Survive and Thrive Workshop Series

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Survive and Thrive Workshop Series

• Session 6
• Business Succession
• 26 March 2009

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Workshop Series Hosts

• South Dakota Small Business Development Centers
  (SD SBDC)
• US Small Business Administration (SBA)
• University of South Dakota
• Regional Planning Districts other Economic
  Development entities

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Workshop Series Dates

• Where do I stand financially? (26 Feb)
• How can I better manage my expenses? (5 March)
• How can I increase my sales? (12 March)
• How do I manage and improve my cash flow? (19
  March)
• Should I have a succession plan in place? (26
  March)

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Ready Talk Seminar

• For those at host locations, please sign in for
  those on individual lines, you have already
  registered with the SBA
• Please note of any questions that you may wish to
  ask. These will be collected at the host
  locations, sent via Ready Talk Chat or can be
  sent directly to jean.rogers_at_sba.gov

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Workshop Goals

• Improve the viability of your business during
  this time of economic uncertainty by providing
  you insight as to your current position and
  empowering you to make financial and management
  decisions to increase the likelihood of survival

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• Should I Have A Succession Plan In Place?

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SUCCESSION

• the business continues
• All businesses are passed-on or pass-away!

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When current business owners will leave their
businesses
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Why have a succession plan?

• Preserves relationships
• Continuity

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When to plan for succession?

• NOW!

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How to plan for succession?

• Select new leadership/successor
• Transition
• Financial planning

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Selection of New Leadership

• Qualifications
• Time
• Family Issues

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Family Business Statistics

• 80-90 of all enterprises are family operations
• 78 of new jobs are created by family businesses
• 65 of all wages paid in the US are from family
  firms

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• www.fambus.org

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Could this be your family?
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Transition of New Leadership

• Training
• Relinquish Control
• Communication
• Exit

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Some people just dont know when to exit
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Financial Planning for Succession

• Retain ownership
• Outright sale
• How much is it worth?

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Business Valuations

• Physical assets
• Income stream

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How To Add Value To Your Business

• Clean books
• No more extra cash

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More ways to maximize value

• Customer diversity
• Management depth
• Recurring revenue
• Proprietary technology
• Penetration of barriers to entry

• Effective use of professionals
• Product/sales pipeline
• Product diversity
• Industry expertise/exposure
• Growth plan

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Business Value Killers

• Poor cash flow
• Complicated/confusing financials
• Questionable longevity

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GOODWILL

• Sometimes called Blue Sky
• Not easy to value since it is very subjective

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A Valuation Example with Goodwill

• Asking Price 100,000 (What are you selling?)
• Assume FMV of assets 60,000
• This means the seller wants 40,000 for Goodwill.
• Is this reasonable?

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• First Find reasonable ROR on 60,000.
• 60,000 x .08 4,800 (normal earnings/yr)
• Second Use historical financial information to
  adjust earnings
• Subtract expenses specific to current owner i.e.
  depreciation, owner draw and other perks AND add
  in anticipated new expenses
• Assume Adjusted Earnings to be 10,000
• Third Subtract Normal Earnings from Adjusted
  Earnings
• 10,000 - 4,800 5,200

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• Fourth Determine a cap rate
• Difficult to determine, but rule of thumb for
  small businesses should be at least 20.
• Fifth Divide the cap rate into the excess
  earnings
• 5,200/20 26,000 (Goodwill)
• Sixth Add net assets to Goodwill
• 60,000 26,000 86,000

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Business Brokers

• Advantages confidential, you keep focused on
  running the business, access to qualified buyers
• Disadvantages can be costly, not all are
  reputable, can be hard to find

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Business Warning Signs

• Debt to asset ratio on the rise
• Losing money and losses are increasing
• Inventory turnover slowing down
• Unable to raise more money for business
• Not fun anymore

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Resources

• Prairie Family Business Association
• www.fambus.org
• Nebraska Business Development Center
• nbdc.unomaha.edu
• Small Business Administration
• www.sba.gov
• Iowa Small Business Development Centers
• www.iowasbdc.org

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Checklist Summary

• Start planning for your departure from the
  business now.
• Engage experts to assist you.
• Communicate with family members.
• Be realistic in valuing your business.
• Look for warning signs and try to mitigate them
  if possible.

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Checklist SummarySession 1

• Do I currently get timely and accurate
  financials?
• Am I using Cash or Accrual basis of Accounting?
• Are there national associations with
  industry-specific
• information that I can be taking advantage of?
• What are my 5 largest expenses? 5 fastest
  growing?
• Which expenses are fixed and which are
  variable?
• Where does labor fall for my business?
• Do I have an advertising budget whose
  effectiveness is
• measurable?
• What are the trends in my Days Receivable and
  Days
• inventory?

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Checklist SummarySession 2

• ? What is my Break Even Point?
• ? What are the SIC and NAICS codes for
• my industry?
• ? Compare key RMA ratios to your
• business (especially Days Receivable,
• Days Payable and Days Inventory)
• ? Calculate Labor Cost by month for
• the last 12 months and annually for
• last 3 to 5 years
• ? Examine Accounts Receivable Aging to
• find overdue accounts. Contact these
• customers to work out a payment

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Checklist SummarySession 3

• Use process as a tool for employee engagement
• Review all expenses, giving special attention to
• 5 highest expenses
• 5 fastest growing expenses
• expenses that are higher than industry averages
• Identify contracts that can be renegotiated and
• begin process, i.e., contact vendors, put out
  for bid
• Identify excess capacity in labor/space/equipment
• Create matrix of all debt terms and review to
• determine restructure feasibility
• Create budget and visuals for measurement
• Identify Breakeven Point for new expense levels

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Checklist SummarySession 4

• Identify exactly who you are going to sell to
• Find multiple ways to segment your customers into
  more specific groups
• Segment your customer base into existing,
  previous and new
• Get serious about customer retention
• Develop a customer database keep it up
• Develop approaches to reduce customer fears
• Make focus on growth an organizational priority
  not just owner/manager

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Checklist SummarySession 5

• Refresh of Financial Ratios having direct bearing
  on cash flow
• Commercial Banking options to bridge shortfalls
  in cash flow
• Changes in SBA programs to improve access to
  capital
• Other options to assist in cash flow

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Future Workshop Topics

• After each session, participants will be provided
  an opportunity for feedback through surveys.
  Based on survey results, future workshops may be
  developed to delve into greater detail in
  specific areas (i.e. factoring, Government
  Procurement, etc).

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We Want Your Feedback!

• Please provide your feedback in the survey at
  your host site, or which will be sent to the
  email address that you provided. This will allow
  us to tailor upcoming events to best suit your
  needs!

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Feedback or More Topics
Next Session

• Contact Jean Rogers
• [phone] ext 0
• jean.rogers_at_sba.gov

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Resources Available

• For a copy of this slideshow
• www.sba.gov/sd
• For additional training and education, visit the
  SBA Resource Library
• www.sba.gov/tools/resourcelibrary/index.html
• (features Podcasts, Publications and Research)