Timothy O. Johnson CPA

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Timothy O. Johnson CPA

• Covering 3 areas today
• Cash Is King
• What is your business worth?
• WHO IS GOING TO BUY YOUR BUSINESS?

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Cash is King

• CASH You can never have enough!

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Cash is King

• Do you know what your cash balance is today?
• Do you know what your cash balance was at the end
  of last year?
• Do you know what your cash balance will be in 6
  months?

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Cash is King

• Organize your business finances
• Prepare Cash flow analysis
• Prepare a cash flow forecast

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Cash is King

• Organize your business finances
• Review prior 24 monthly financials
• Analyze your revenue by month
• Calculate monthly expense in detail and in total-
  investigate the outliers.
• Prepare a monthly cash flow analysis and forecast

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Cash is King
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Cash is King

• Review your accounts receivable policies
• Take a look at your purchasing procedures
• Do you have control over your largest expenses
  (most likely Labor).

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Cash is King

• Realistic forecasting pitfalls
• Overstating sales. High expectation of revenue
  numbers may motivate the sales staff but not
  good for cash flow forecasting. Use conservative
  revenue estimates.
• Understating expenses
• Not reflecting seasonal fluctuations.
• Not planning for the unforeseen (Have a reserve
  for all those crazy things that come along)

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Cash is King

• Controlling sales personnel costs
• Sale people salaried are they living up to their
  salaries
• Commission only sales people- Any incentives?
• Salary plus commission- do they need to cover the
  salary before earning commission.
• Who are they accountable to and for what?
• Have you compared your compensation program to
  like kind companies?
• How do you weed out the bad performers?
• What are your benefits? Too much? Too little?
• Do you show the total compensation package to the
  employee.

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Cash is King

• Getting money out of your purchasing.
• Stretching the payment cycle.
• Pay earlier to get discounts. 2 discount on
  10,000 of monthly purchases is 2,400 per year
  in savings.
• Paying earlier to get better prices. Suppliers
  provide better services and prices to the
  customers that pay promptly.
• Banking relationships
• Lines of credit
• Sweep products
• Cost of banking

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Cash is King

• Collect your money quicker.
• Do you know who your best customers are?
• How do you evaluate your best customers?
• Sales volume?
• Gross Profit margin?
• How fast they pay?
• How much time they take to service?
• Quantify it and then subjectively evaluate.

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What is your business worth?
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What is your business worth?

• Value drivers
• Diversity of customer base
• Diversity of products
• Margin levels
• Product risk

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What is your business worth?

• Methods of valuing business
• Multiple of revenues
• Rule of Thumb
• Net liquidation at fair market pricing
• Discounted future cash flows
• Recent comparable sale price
• Comparable public company price

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What is your business worth?

• Multiple of revenues
• This method does not take into account the
  concept of Profits.
• Surprisingly, it is used in many industries that
  have high margins and approximates the discounted
  cash flow method in these cases.

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What is your business worth?

• Rule of Thumb
• Many private companies sell at a multiple of the
  owners discretionary cash flow.
• Owners salary plus
• Other distributions to owners plus
• Discretionary fringe benefits i.e. country club,
  luxury car, airplane, etc
• Plus cash flow left in the business

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What is your business worth?

• Net liquidation at fair market pricing
• Basically the auction price. This is a great way
  to buy a business if you can.
• Not used with ongoing businesses unless the
  business has failed or is extremely low margin
  with other complications.

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What is your business worth?

• Discounted future cash flows
• Gets into the math models a little deeper.
• Projects future cash flows and then present
  values these cash flows to come up with a value.
• This method is used quite a bit by Investment
  bankers in hyping a sale.
• It is purported that Warren Buffet uses this as
  an integral part of his investment decision
  making

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What is your business worth?

• Comparable public company price
• The IRS recommends using publicly traded
  companies as a benchmark. The IRS adopts this
  position because data is readily available to
  perform the analysis.
• Unfortunately, private companies rarely are
  comparable in terms of size, management depth or
  financial strength.

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Who is going to buy your business?
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Who is going to buy your business?

• Who is going to buy your business.
• Employees
• Family
• Present partners/shareholders
• Third Party
• Liquidate

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Who is going to buy your business?

• Employee purchase of business
• ESOP- Employee Stock Ownership Plans- These are
  tax advantaged sales of a business. Highly
  marketed but rarely used because of complexities
  and costs.
• Key employees purchase
• Very common for retaining key employees
• Can be spread out over time for ease in
  transition.
• Can be in the form of restricted stock (golden
  handcuffs)
• Dont need to sell all of the business at one
  time.
• Works well in the semi-retirement mode.
• Works well when considering a third party sale in
  the future

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Who is going to buy your business?

• Family purchase
• Can be structured to combine gifting and purchase
• Discounting for minority interests.
• Transferring early may lower estate taxes
• Downside includes disgruntled employees, other
  family members.
• End result may become a family dream/nightmare.

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Who is going to buy your business?

• Present partners/shareholders
• Properly structured and understood buy sell
  agreements are a must.
• Various methods can be used to benefit the buyer
  and the seller
• Provides for smooth transition in case of death
  and disability.
• Works great in retirement mode.

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Who is going to buy your business?

• Third party sale
• Strategic buyer- This is usually someone that
  could fold your business into a present business.
  Also includes expansion of territory buyer. Many
  times this buyer will pay the highest price
  because of perceived synergies and economies of
  scale
• Financial buyer- Purchase is purely on the
  economics of the deal. Buy, build up and sell.
  The exit strategy is usually formulated before
  they even own the company. Venture capitalist
  may be involved.
• Roll up of an industry- Happens in a fragmented
  industry where the buyer perceives that the whole
  is worth more than the parts. This type of buyer
  may pay a strategic buyer price during the
  beginning of the roll up phase while at other
  times the may act like a financial buyer.

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Who is going to buy your business?

• Liquidate
• Probably the worst result
• Happens when none of the other methods have been
  used and a death or disability occurs.