How much is my company worth? It seems like a simple question. You might be asking it because you are working on your estate plan. Or you may be creating a buy/sell agreement. Or you may be completing your annual business financing applications and personal financial statements and question the appropriate inclusion for your balance sheet. Or you may be considering the acquisition of a strategic partner and evaluating purchase terms. Or maybe you are embarking on a strategic planning exercise want to identify the factors that would prove most significant in enhancing value and market position. Regardless of the reason you’re asking the question, the answer is the same: you need a business valuation. Simply put, a business valuation is exactly what it sounds like: it determines and communicates the value of your company. However, it gets more complicated when you begin to consider all the factors involved in determining value. But, what is a business valuation?

Understanding what a business valuation is means understanding the factors that impact what your company is worth. Listed below are some of the key drivers:

Purpose

The purpose of the valuation and the parties involved impact the value of your business. Your company is worth more for certain purposes than others and to certain parties than others. For example, an investment or financial buyer, someone who is purely interested in the assets and earnings opportunities for the firm, may not value the company as much as a strategic buyer, someone who sees valuable synergies between your operations and theirs. The value among family members, a liquidator, an ex-spouse, or the IRS, will differ as well.

Relative Risks to Earnings

A valuation is a process that attempts to estimate the value of an entity through the identification of market comparables and through an understanding of the likely estimated earnings stream coupled with an evaluation of the risks associated with the realization of that earnings stream.  While a summary of historical earnings is an important benchmark, an understanding of the expected future earnings in the hands of a likely buyer predicates the value to that buyer. A valuation typically does not does not look at one good year but rather what factors affect growth over time and can be realistically expected to continue into the future.

Control

There is often a question of the ability of an investor/ owner to exercise control over the entity and its operations. The valuation subject must be clearly identified. Is the valuation to consider the enterprise as a whole or a segment of the ownership? If a segment, is the ownership position a controlling or non-controlling segment? To the extent the owner lacks control, it must be determined if earnings distributions and salaries as well as control of management are outside of their control and if so the relative impact on the value of the interest.

Market

It is usually difficult in the privately held enterprise market to find accurate market comparables. Enterprises are usually unique in product, staffing, skills and market positioning. Further, public sources for the data that would be needed to identify comparable trades is generally not available. Rules of thumb may be available but usually fail to consider crucial factors and characteristics. That being said, consideration of market trends and positioning is essential to the valuation process. The ever changing markets and the impact of new products, technologies and business models requires consideration whenever one is attempting to evaluate future expectations for an enterprise.

Qualitative factors

It seems logical that the value of a company would come mostly from the financial statements. However, many qualitative factors impact how much your company is worth, including brand reputation, personal goodwill, expected loyalty of key management and intellectual property. For example, if the revenues of the company are largely dependent on the relationships built by one key person, contracts insuring the longevity of those relationships increase the value of the business.

Purpose, market, risks, control and qualitative factors impact the methods chosen to determine of the value of your business. Understanding the standards, premise and methodologies is key to the accuracy and usefulness of the valuation findings. Click here to read more blogs from our Business Valuation 101 series.

If you’re still asking yourself, “what is a business valuation?”, we can help. Contact Cray Kaiser today to get started.

Your son John has the best sales record on the team. Your daughter Mary’s advertising campaign was a huge success. But despite their talents and success, neither has a head for numbers. And neither has much savvy when it comes to culture and management. Kevin, your right-hand man for the last 15 years, runs operations smoothly, managing both finances and people with ease. He’s the obvious leader. But he’s not family. And he’s not an owner. As you begin to plan for your retirement, how do you do what’s best for your family without risking losing Kevin? Focusing on the company as an entity rather than the people as individuals allows you to set emotion aside and gain the perspective you need.

 

Succession planning for family businesses is essential.

Leaders will not always agree on the best decisions. Rather than arguing and creating unnecessary drama, the team can simply refer to the plan, finding the structure and direction to guide them to the correct decisions. Succession planning for family businesses allows you to make necessary changes within the family structure for the business without being interpreted as an individual slap or reprimand.

 

Including key nonfamily employees helps your family and your company.

This is your business. And your family. You’ve poured your blood, sweat and tears into this company. And now you want to see your children benefit from all that hard work. You recognize that the best way for your children to succeed is by ensuring that Kevin stays with the company after you leave. Without Kevin’s leadership, John and Mary will struggle to run the company on their own. Your succession plan must find ways to keep Kevin involved, motivated and loyal.

 

• John and Mary will have an emotional attachment that can cloud judgment. As an outsider, Kevin has a more objectivity. His fresh perspective is unique from family members, and he can see issues and opportunities those raised in the business may miss.
• John and Mary are lacking in some of the experience and talents necessary to run the company. As the company grows, Kevin’s leadership skills, experience and objectivity will become even more important.
• Because of Kevin’s direct impact on the success of the business, his loyalty and longevity will likely factor in to the value of the business. Noncompete and other employment contracts are essential.

 

Succession plan options that help retain nonfamily key employees.

A succession plan, especially one that endeavors to involve both family and key non-family employees, must be customized to your unique business needs and objectives. Every business, every family and every ownership structure is different. Various options are available, but what’s best for your company may be completely different from what’s best for your peers.

 

A few options to consider include:

 

• Minority ownership interest. This option gives a key nonfamily employee a vested interest and a measure of control over the direction of the company. However, if your most important employee is your nonfamily member with minority interest, minority ownership may not give him the influence and power necessary to run the business in the most profitable way.
• A family employment policy. This type of policy assures nonfamily members that family members will not receive undue financial reward or promotion just for being part of the family. This increases their trust and their motivation to continue to work hard toward success.
• Phantom stock plan. Phantom stockowners are entitled to distributions and interest in profits and losses as well as a percentage of the sale price. However, they are not involved in overall or discretionary management.
• Bonus arrangements tied to performance and focus.

 

Always communicate.

Simply including key nonfamily employees in your succession plan is not enough. They are more likely to be loyal and motivated to work hard if their value to the company and their future with the company are clearly defined and communicated.

 

• A good place to start is a conversation between parents and children about the business, aligning the children’s and parents’ goals and aspirations with respect to the business. Once the objectives are laid out, the dialogue should be expanded to other key players with the appropriate safeguards.
• Clear communication of their inclusion in the future of the company reduces suspicion that family members will be favored for promotions, leadership, ownership and financial reward.
• As your retirement approaches, nonfamily employees will likely question how their career will be impacted by the next generation of family leaders. Communication regarding your succession plan diminishes the risk that these key nonfamily employees will start searching for new opportunities as you near retirement.
• Transparency about succession plans reduces conflict arising from misinformation and assumptions. By sharing your plan, you curtail resentment, unanswered questions and jockeying for position.
• Awareness of goals and personal investment and pay-off motivates employees to work harder. Rather than wondering why they are working hard when they are not sure when or if they will ever own the business, they are motivated by seeing when and how their hard work will pay off.

 

Thinking back to your situation with John, Mary and Kevin, how will you keep Kevin loyal to your company as you approach retirement? Will you offer him phantom stock? Assure him with a family employment policy that reduces the risk that he’ll be overlooked just because he’s not a member of the family? Should he have any ownership interest? Or does he need more control to drive the company toward success? Your best bet is to involve your trusted advisors in your succession planning process. With a full understanding of your company’s operations, risks and family dynamics, you and your planning team can create a succession plan that keeps Kevin loyal to the company and helps John and Mary achieve the success you’ve always wanted for them, and for your company.

 

Succession planning for family businesses is vital. If you’re looking for help with your succession plan, please contact Cray Kaiser today.

“It’s not fair.” When your children are toddlers, this statement hits you like nails on a chalkboard. But when you hear it from your grown children, it can quickly turn from an annoyance to serious family drama. As a family business, attempting to keep children’s compensation fair can be a minefield. Following a few simple compensation-planning strategies helps you maintain peaceful family dynamics while strengthening your business at the same time.

As a family business owner, you are pleased when you walk by a marketing team meeting and see your son suggesting ideas for the new website. You have built a strong, successful business, and you are proud to be able to pass it down to your children someday. Inside this article you will learn seven key ways your business will benefit from including the next generation of business owners in accounting meetings and practices.

As a business owner, you are immersed in your business. You wake up thinking about strategies for growth. Ideas for new products hit you while you are out walking the dog. Solutions to operations issues come to mind while you are falling asleep at night. You spend much of your time and energy building your company into a strong and successful business. But do you spend enough time thinking about how you are going to walk away from it? Are you asking yourself: what is an exit plan?

 

Exit planning can feel overwhelming, even for the most prepared business owner. The company is a large part of your identity and your legacy, which can make the transition to retirement or a new adventure a challenging proposition. For many, that makes exit planning a difficult process to begin. However, a well-planned exit strategy is essential for a smooth transition to new ownership, for ensuring your future financial goals are met, and for sustaining your business and your legacy.

 

The purpose of an exit plan is three-fold:

• Achieve your goals and objectives as the seller.
• Prepare your business for transition. Resolving issues in advance decreases risk for the buyer, which increases the value of the company.
• Prepare for unexpected changes in business climate and or ownership. An exit plan can provide a smooth transfer, which can mitigate an unanticipated loss of a business owner, key employee or customer.

 

First, evaluate you. Your first step in starting to create an exit plan is to begin a process to determine your goals and objectives. Beyond maximizing sale price and preparing the business for sale, imagine what you want your life to be like after you choose to leave your business. Leave on your terms. A strong exit strategy starts with a complete understanding of the financial state and structure of the business and the owner, as well as minimizing the tax implications from a sale. You and your advisors will work through a process to determine how much money you want to set aside so you can continue living the lifestyle you choose, keeping in mind that none of us know how long our lifespans will be. It can be hard to imagine how you will spend your time when your days are not filled running your business, but taking the time to imagine that life allows you to plan for and fund the life you want to live.

 

Next, evaluate your business. You’ll need to fully evaluate your company’s activity, structure, assets, business drivers, ongoing operating activities, market position and personnel. A business valuation gives you an understanding of the base point, including the company’s relationship to the industry, customers and employees. Understanding your company’s value drivers and cost matrix gives you the strategic tools to forecast and modify future operating expectations. Your most trusted advisors provide expertise in examining various areas of your business and identifying the company’s key requirements for growth. Include your accountant, valuator, attorney, insurance agent and your investment advisor. With your advisors, determine whether or not the company’s value will meet the needs and goals you have identified.

 

The next step of the exit planning process is to mold the business to the optimal position for sale or transfer by mitigating or correcting any issues identified during the valuation process that might lower the value of the business. Imagine yourself as a potential buyer. What risks do you see? Which parts of the company attract you and which would make you turn away? With your advisors, create a plan to maximize the value of the business and to mitigate risk prior to exit timing.

 

Your exit plan might include:

• Securing vendor and customer contracts
• Training and preparing potential future business owners, key managers and employees
• Obtaining noncompete, nonsolicitation agreements with employees
• Communicating with key employees in a transparent manner to ensure they stay with the company throughout the process
• Compensating key employees in a way that keeps them interested and invested in the company through the transaction date and beyond
• Managing pending litigation and contention obligations
• Correcting flaws in operating activities that could affect margins or profitability
• An understanding of the competitive environment and managing risks
• Solidifying reporting practices to satisfy future due diligence requirements

 

Next time you are out walking the dog and are inspired with a new product idea, take it one step further. How will that new idea impact my exit plan? Would it make the company more valuable to a potential buyer? A solid exit strategy and plan with the help of your trusted advisors gives you peace of mind. You have confidence that your beneficiaries are prepared in the event of a tragedy, that you are optimizing your position, and that you are on the right path to achieving your goals for your company, your future and your legacy.

 

If you’re still asking yourself, “what is an exit plan?” Contact Cray Kaiser today. We can help you get one started.

Hearing marketing advice from your accountant may be surprising and unexpected, but if you are working on your IRS Tax Form 990—the return filed by non-profit organizations—it’s exactly what you should hear. At Cray Kaiser, we refer to Tax Form 990 as your “resume for big donors.”

 

Yes, your accountant checks over every detail to be sure that the IRS—the number one audience for Form 990—continues to consider the organization tax-exempt. But did you know that Form 990 is also available to and frequently read by the general public?

 

The audience goes far beyond the IRS, and the information contained on the form answers important questions for a wide variety of interested readers, including:

• Donors
• Researchers
• Foundation program officers
• Corporate giving officers
• Media
• Researchers
• Legislators
• Job applicants

 

Imagine a potential donor who is planning to make a large donation and is choosing among three organizations, one of which is yours. The donor pulls up the three 990 forms to learn more. She reviews mission statements, achievements and financials. She considers how much money went to the mission versus how much was spent on advertising and overhead. She examines Board of Trustees and senior management lists, possibly researching more about those involved with the organization.

 

How does your Form 990 compare? Will she choose your organization over one with a Form 990 that effectively communicates the mission of the organization and persuades readers to support the cause?

 

Using Form 990 as a marketing tool can be achieved with a few simple steps:

• If you have writers, marketers or public relations resources available to you, use them.
• When answering questions, attempt to grasp and hold on to the reader’s attention by writing in an interesting but concise manner. Consider your target audience. How can you answer the questions in a way that would most appeal to them?
• Use every opportunity to promote the organization. Rather than directing a reader to another response that seems to answer a similar question, answer every question to showcase your organization’s strengths.
• Tap into your company’s available assets. Refer to language and content in your grant proposals, annual report, marketing materials, social media, blogs, mission statements and any marketing materials.
• As you fill out this annual return, stay motivated and attentive. Review each and every question each year. Emphasize new accomplishments and new programming. Many organizations leave the narratives pro forma from prior years. This allows their descriptions and activities to look and sound dated.  Donors, like all consumers, want to partake in or contribute to fresh ideas and new causes.  Consider any changes in the organization, any new materials, language or content that could improve the form’s ability to persuade donors and other readers.

 

It’s not often that your tax form serves as a marketing tool, but in this case, that’s exactly what it is. Use this opportunity to persuade that donor with money to bestow that your cause it the most deserving one. And while you may not turn to your accountant for advice on your new logo or advertising campaign, the advice to use your Form 990 as a marketing tool can make the difference between getting that big donation or having it pass you by.

 

If you have questions about Tax Form 990, please contact Cray Kaiser today. We’re here to help!

Are you considering a merger or acquisition as the best solution for your business’ growth or exit plan? As shared in last month’s blog post When Mergers and Acquisitions Make Sense, mergers and acquisitions (M&A) can provide a more efficient, cost-effective way to grow a company, whether it’s by adding people, processes, or products. M&A can also be the perfect way to secure the financial goals you have for yourself and your family as you exit the company you built.

Being proactive and creating a simple M&A strategy sets you up to use your time wisely and to secure a financially-beneficial deal. It is wise to review these top six mistakes business owners make when considering a merger or acquisition and how to prevent them as you create your own strategy:

1. The merger myth.

You hear it all the time: “mergers and acquisitions.” However, there are few true mergers. Merging two companies almost always results in one company acquiring the other. Why? It all boils down to the fact that there can only be one true leader, one chief.

Consider this an acquisition, not a merger. Are you being acquired or are you acquiring? Who will be the leader? Addressing this in the beginning avoids tension down the line.

2. Neglecting the “why.”

If you do not have a strong grasp of M&A goals, you may move forward with a deal that does not help you achieve your goals or, worse yet, moves you further from your desired results.

Your very first step in the process is identifying your goals. Determining when mergers and acquisitions make sense can help you along this process.

3. M&A Target Ignorance.

Not spending enough time identifying targets that help you achieve growth or exit-plan goals means wasting both time and money on negotiating with the wrong potential partners.

Before you find yourself responding to interested parties, identify who you believe would be the best match for your company.

4. Overlooking people and process changes.

Which roles will be duplicated? What will happen to the people in those jobs now? Which company’s process will be used for which tasks? Not answering these questions before they’re asked puts your company into a state of turmoil, creating unhappy team members and risking losing the exact talent you are attempting to acquire.

Plan for changes in people and process. Be transparent with all involved. Communicate plans to reduce tension and create internal support.

5. Emotion-driven decision-making.

It is easy to get drawn in by a strong connection with people you would love to do business with. Pressure to find a solution to growth or exit planning issues can make a deal look more attractive than it truly is.

Involve objective advisors from the start to guide you with an unbiased, impartial perspective.

6. Underestimating time.

Having unrealistic expectations about the time involved in the M&A process can frustrate you and the other people involved and create rushed decisions. Both parties involved will be interrupted with the challenges and responsibilities of running their businesses. As time goes on, expectations and projections can change, requiring everyone to maintain flexibility throughout the process.

Stay grounded and realistic in your expectations around the pace of the process. Lean on your advisors to take some of the work load.

The M&A process is an adventure, one that can end with a new entity that helps all involved meet goals or with one or all parties regretting their choices. To have a successful M&A process, be proactive rather than reactive. Understand when mergers and acquisitions make sense. Prevent the six common M&A mistakes. And involve objective advisors from the start.

If you’re considering a merger or acquisition, contact Cray Kaiser today. We can help you review your options.

Growing companies often choose to create a board of directors or an advisory board to bring in outside influence and perspective. While the two kinds of boards have similar responsibilities, differences in how the boards are managed influence which type of board should be used. Most companies bringing in outside advisors for the first time start with an advisory board because it is less formal and less constricting.

Out of the blue, you’re approached with what sounds like a great deal, almost too good to be true. An owner of a company in a similar industry wants to merge. You’ve been thinking about how to boost your flat-lining sales. Could this be the solution? Mergers and acquisitions can be the perfect answer to issues around growth or exit planning, but exploring them can also cause more problems than they solve, wasting both time and money. How do you tell the difference? First, understand the beneficial reasons to consider mergers and acquisitions (M & A). Second, learn and avoid mistakes commonly made by businesses when considering M & A.

If you’re considering a merger or acquisition, being proactive rather than reactive gives you the most control and keeps you in the best position for negotiations. Typically, your main motivation to even consider a merger or acquisition is to fuel growth or fuel your exit. Understanding yours and your company’s goals and needs in relation to these motivations before approaching an M & A situation is your best strategy.

Fueling Growth

Most companies seek development – organically or by acquisition. When considering expansion, many keep their focus a little too broad by simply thinking that they want to increase profits. Strategically, it is important to dive down into the three main areas of growth and determine which one (or which combination) will drive opportunities for financial impact.

• Process: A merger or acquisition is effective when the sophisticated systems at one company will benefit the other and when acquiring those processes will be more efficient and cost-effective than developing them on your own.
• People: A merger or acquisition may be wise when hiring and training people will be more costly and time-consuming than acquiring the talent the other company has already developed.
• Product: The cost and time involved with expanding a product line can be prohibitive. Merging or acquiring another company that is already successfully manufacturing and/or selling those products can be the optimal solution.

Fueling Your Exit

If you’re not planning on gifting or selling your company to family or other team members, a merger or acquisition may be the exit plan that provides you with the retirement you’re seeking. Having a plan in place for the change of ownership ensures that you secure a desirable deal to reach the financial goals you set for yourself and your family. Achieving financial objectives and a smooth transition of ownership occurs when the business owner plans in advance, takes the time to view the business from the perspective of a prospective buyer, and makes changes necessary to make the business more marketable and desirable to buyers.  The value of your business will be determined based on anticipated future cash flow of the operations.  Fully examining your operations and “getting your house in order” ahead of time is key to securing the valuation you may seek.

Another benefit when considering a merger or acquisition is that, even if the deal does not go through, you will have learned a lot. First, the next time you consider a merger or acquisition, you and your team have a much better understanding of the process and can manage it more quickly and cost-effectively. Secondly, the process teaches you a great deal about your business. Looking at your organization through the eyes of someone considering you for a merger or acquisition gives an entirely new perspective on your businesses. This perspective can help you to identify changes that will make your business even more appealing in the next opportunity, like securing non-compete agreements with key employees.

If you are considering a merger or acquisition, be sure to seek legal and financial advice before connecting with potential new business partners. Click here to review six mistakes companies make when considering a merger or acquisition. The biggest mistake companies make is to move far along in the process before seeking legal and financial advice.

If you have questions about mergers and acquisitions, please contact Cray Kaiser today.

In November of 2015, sponsors of audited employee benefit plans received a letter from the Department of Labor notifying them that over 40% of all audits submitted were not completed in accordance with auditing standards. Why is this concerning? Because audits that are not correctly performed create many issues for all those involved with employee benefit plans, including the plan sponsors, fiduciaries and participants.

Annual audits are an ERISA (Employee Retirement Income Security Act of 1974) requirement for plans with participants over a certain threshold and are attached to Form 5500. An audit verifies the assets of the plan and confirms the plan is operating according to the plan documents and in compliance with applicable laws and regulations. These audits have a filing deadline of October 15 each year.

Errors in plan administration can trigger issues with the IRS, including penalties, and can also cause legal problems for the plan’s fiduciary. More importantly, audits that are correctly done can detect a number of errors that, if not caught early, turn into major problems.  Commonly seen errors include: incorrectly calculated employee deferrals, employer matches, and deferrals for unique forms of compensation (like commissions or bonuses). Other common issues that may be uncovered with an audit include:

• Improper disposition or holding of forfeitures
• Failure by the plan of certain nondiscrimination testing, without adequate corrective action taken
• Top-heavy issues
• Other deviations from the Department of Labor and IRS requirements or from the plan document

The November Department of Labor letter communicates the results of the DOL’s audit of plan auditors. The intent of the letter was to encourage plan sponsors to confirm that they are using qualified, experienced auditors. Plan administrators are held responsible as fiduciaries of the plan, and can be held personally liable if they are not making reasonable choices with regard to their plan. This includes due diligence with selection of their plan’s auditor.

While many accounting firms are choosing not to continue to offer employee benefit plan audits as a service, Cray Kaiser assures clients that we are uniquely qualified for this work. In addition to our commitment to quality and continued education in this area, our staff has a great deal of experience understanding the nuances of these audits. Cray Kaiser is also a member of the American Institute of Certified Public Accountants’ EBPAQC (Employee Benefit Plan Audit Quality Center), a group created to improve quality of benefit plan audits with news alerts, training, webinars, audit quality center and other resources.