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| First Person |
Entrepreneurial End-Game
Wally Obermeyer and Brett Suchor
02/02/2004
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Business owners rarely underestimate the value of the companies they build. To avoid disappointment, determine a realistic target price by analyzing the key elements of your business.
| Identify your key assets. These may include customer relationships, market position and/or employees. Recognize and nurture them. | | Focus on cash flow. Give up the pet projects that are still trying to reach breakeven. Today, the market will pay
a premium for stable, reliable cash flow. | | Develop realistic growth targets. If your projections appear too optimistic, the market may discredit them entirely. | | Cut expenses. But do not cut to the extent that growth
is sacrificed. | | Renegotiate or restructure your debt. You can decrease your risk by restructuring your debt to improve its terms or, in some cases, by increasing the amount of debt in your capital structure, which can reduce your overall cost of capital. | | Develop contingency plans. |
It is imperative to carefully consider the structure of the deal to suit your tax, cash flow and risk preferences. During one business sale in the advertising industry, for example, the seller inadvertently increased her risk by agreeing to hold restricted stock of the acquiring company. As a result, she was at the mercy of wildly gyrating markets. In another all-stock transaction, a post-sale employment agreement prohibited the seller from hedging the buyer’s stock. This agreement made risk management much more difficult.
Perils to Proceeds
Investing the sales proceeds is also rife with potential pitfalls.
A good place to start is with an honest assessment of
your lifestyle preferences, and your new portfolio’s ability to produce income and to grow, as well as your willingness to dip into principal. We’ve had a handful of clients who, for the first few years after they sold their business, simply overspent, made reckless investments, and gave too much away. A few years later, they had to rein themselves in and sell the airplanes, boats and third or fourth homes. A rule of thumb might be to limit your portfolio consumption to no more than about 3 percent or 4 percent of the balance annually, in order to retain enough to pay taxes and still have enough so growth of the portfolio will keep pace with inflation.
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