Are You Leaving Anything For Yourself?

Desert First

I am proof that an old dog can learn a new trick. After almost 30 years as an accountant and business advisor, I’ve stumbled on an approach that may have big benefits for you and your marina operation.

Are you sick and tired of not having enough cashflow at the end of the month to pay yourself? Every vendor, insurance company, employee, and the State of Florida get paid before you do. And sometimes, you have to explain to your spouse that you’ll need to dip into the rainy-day fund to pay your house payment this month.  We doggedly persist in tough times, and sacrifice to leave every penny in our company. When we forgo our own payday we rationalize that we are continuing to invest in our business and that it will pay off someday.

So why is it so hard to squeeze out something for yourself?  And, have you ever been frustrated that you don’t really seem to get useful information from the monthly financial statements you pay your bookkeeper for?  Aren’t those financial statements supposed to help you manage your business?

I think I can speak for many small business owners when I state that preparing financial statements becomes a chore done primarily to satisfy the banker and to organize data for annual tax returns. One thing I’ve understood for many years is that GAAP accounting rules rarely provide the most important information we need for managing a small business.  Financial statements are a snapshot from your rearview mirror.  What happened yesterday.   They do not tell me what I need to do for tomorrow’s profitability. 

For my clients (and my own businesses) the challenge has been to develop practical management methods in addition to the accounting system. Tools which provide the information needed NOW to stay in control of a business.

Recently, I was in the process of creating a daily cash management process for a small manufacturing company, when I discovered  Profit First by Mike Michalowicz. The instant I saw the book and the basic concept I thought “Hell yeah!  Let’s see what this guy has to say.” As I read further I found myself nodding my head in agreement about the shortcomings of the established systems of financial accounting for small business owners.

I have no affiliation with Mike.  I wish I would have known about this approach many years ago.

Mike’s premise is that your business must be honestly profitable, and that profit should be harvested right off the top of each sales transaction and placed in your personal funds out of the insatiable reach of the business. If you cannot do this, you are simply kidding yourself and should move on to a new endeavor before your equity is completely exhausted. Tough love! Skeptical already? You’ll need to suspend your skepticism for a bit and give Mike a chance to lay out his process. 

Mike does a superb job of showing how you can transition your business from your current method of robbing Peter to pay Paul to his Profit First method.  He shows you how to take immediate steps and to begin with small bites while gradually transitioning to your targeted profitability within twelve to eighteen months. His system will totally transform the way you manage your business and cashflows.

A very high level overview of his approach:

  • Pay yourself first instead of last
  • Determine profitability goals based on industry and size
  • Segregate cashflows in separate bank accounts
  • Make small changes at the outset (taking a very small profit) with consistent increases until you achieve your desired profit objectives
  • Manage operations by living within departmentalized cash limitations – this drives creative solutions and forces hard decisions to be addressed NOW – not later.
  • All of this is organized so that you can measure the health of your business in an instant.

As you study Mike’s approach, you’ll likely tell yourself this is no big deal. No rocket science here.  And that is absolutely true.  But Mike created a process. And by golly, his process is well thought out and very effective.  All it requires is an open mind.  Even if you give the process a try for a year, the worst that can happen is that you’ve opened a couple of additional bank accounts that can simply be closed.  But my guess is that you’ll find a new management tool that is so helpful that you’ll keep those accounts open.

I am not proposing that you ditch your accounting system and fire your bookkeeper.  No – this process fits within your existing accounting system – more like an overlay.  Your tax gal and your banker will still get all the information they need, but most importantly, you’ll be operating much more efficiently and will have a daily, instant report card for the health of your marina. Oh – and some extra jingle in your pocket!

Three Tugs

Pop Quiz - What is the Quickest Way to Clear Your Marina of Pesky Customers?

If you answer "raise slip rate by $3 a foot" you are correct!

Empty Marina - Sad!

Empty Marina - Sad!

Bruce Swabb, CPA

Your customers want to love you and your marina.  No kidding.  They want to have a special feeling for the place they keep their boat and they want to feel good every time they drive up the gravel drive to the marina.

You’d be surprised how many marina operators have forgotten how to make their customers feel at home.  I completely understand how this happens because you have a number of big concerns facing you every single day.  The electrical posts are acting “funny”, you’re wondering how to reverse the silting that is slowly filling in the slips, the dockmaster really does need a raise and the charcoal grill just went kaput for crying out loud!

I also completely understand that you’ve been chewed on pretty thoroughly by quite a few of these customers over the years, and that really does get old.

Susan and I have lived in many marinas over the years and have liked most and really loved a few.  Sadly, one of the marinas we loved the most was so poorly and unprofessionally operated, that we were always on the edge of moving our boat.  In short, the marina manager made the customers feel as if they were lucky to even have a spot and that if they were to leave, the marina could quickly fill the open slip.

But I am convinced that there are few businesses that have better customer retention than a marina IF just a few commonsense needs are met.  And if these needs are met, the slip rental rate is pretty low on the “last straw” list for your customers.

·         Welcoming feel – keep top of mind that each of these customers will put several thousand dollars a year in the till.  If you can keep a customer for 3 to 5 years, their business is worth quite a bit to you.  Make sure that every staff member stays focused on customer satisfaction and creating that welcoming feeling.  Give your staff a place to blow off steam in private when they get a load of grief from a customer.

·         Security – Our marina is located within a gated community (with real guards expecting to see real identification) and has the best security I’ve seen yet.  Few marinas have that type of security but you should ensure that steps are taken to protect your customers’ property.  Surveillance cameras have come a long way over the last few years, and on-site nightly security is very important.  Especially where marinas are nestled into the dense urban landscape of a city like Fort Lauderdale.

·         Clean, modern and ample bathroom/shower facilities – Keep the ladies happy with the shower and bathroom facilities and she will remember your marina and spread the word to other boaters.  And of course, if your bathrooms are a horror show – she will ABSOLUTELY spread the word.  But why not just knock her socks off with a really nice facility.  Oh, and please – spend the extra $200 per year and offer real toilet paper, rather than the 2-inch wide stuff that comes on a 1,000-foot spool.

·         Quality amenities – Each marina is unique and most have real limitations in what they can offer.  The important thing is to make sure that what you offer is of high quality and well maintained. We have always loved marinas with an open air gathering place for boaters to hold their much loved pot luck gatherings.  At our current marina, we all sit under the shade of a giant live oak tree.  A covered pavilion would be great, but we don’t expect the marina to go that far.  A commercial grade grill (propane or charcoal) will stand up to heavy use.  A laundry room with ample washers and dryers will save a ton of time for your customers.

·         WiFi – I think marinas have now realized that boaters are heavy wifi users.  Hey, Netflix needs lots of speed!  Internet access is one of those amenities that will earn your marina negative remarks for not having enough bandwidth.

·         Clear policies and rules, fairly applied – You should have as few policies as possible and be strict and matter of fact in enforcing them.  You certainly don’t want your customers to feel browbeaten, or that the rules are applied to some and not others.  Worse yet, you don’t want them to feel as if they can be asked to leave the marina at any time for violation of some rule they may not even be aware of.  Your customers should see your marina as a haven from oppression.  Payment policies are one area that you show no tolerance.  If you are providing all the great things listed above, you should demand the customer live up to their side of the bargain.

·         Reasonable rates – Obviously, I’ve saved this item for last.  Do you know the competitive slip and dry storage rates of the marinas in your area?  Where are your rates in the spectrum?  Market and economic forces have a big impact on what you can charge, but if you keep your customers warm, fuzzy and satisfied, you will have much more acceptance of your slip rates.  Your long-term customers also know that there will be times when you must raise their slip rate.  Communicate your need and show them that you are maintaining the property – and that you do not take their patronage for granted – and you will retain most of those customers.

You know all of this already – but sometimes it helps to be reminded.  Now get out there and create some warm and fuzzy shelter from the madness outside your marina gates.

Bright and Cheery - Happy!

Bright and Cheery - Happy!

Some Days You Get Whacked Around

shit kickin.jpg

Bruce Swabb, CPA

I can tell you that being a business broker is a bruising business.  But it surely can be exhilarating!  I guess that’s what keeps us going.  It’s like that perfect golf shot.  Thwack! You get so few of those, but you keep swinging away every day to get that feeling again. 

The truism “if you’re not pissing somebody off, you’re not getting anything done” seems to fit my job most days. 

Hey, this isn’t a pity party.  I wanted to make the obvious statement that selling your business is hard too.  You know that.  You set a goal and envision what your successful sale should look like.  There will be many twists and turns, up days and just plain depressing days along the path to the completion of a transaction. 

Enjoy every grueling minute of it!  Yell at me!  I can take it.  I might even yell back at you.  Then I’ll buy you a beer.  And tomorrow, we’ll do it again.

Wow! Your Kid Wants to Run Your Business!

Father and Son.jpg

Count yourself lucky. It’s a pretty rare thing indeed when your kids have an interest in your business, and even more so when they have the desire to take the reins and assume responsibility for the whole operation. 

Doubtless you’ve been grooming your son or daughter from the ground up.  Teaching them all aspects from the menial maintenance chores to the secret intangible sauce that makes your business win and retain customers.

Transitioning your business to within your family can be one of the best ways to sell your business.  Why?  Because -

  • you can structure a transaction that can pay you a stream of income and essentially fund your retirement;
  • it will allow you options as to how much you continue to work or provide essential guidance and intangible knowledge (which is often the secret ingredient for success); and,
  • you’ll get tremendous satisfaction by setting up your son or daughter to earn their legacy with the business you created.

Deal Structure

The primary focus of this post are the alternative structures of the financial deal between you and your successor.  The tough trick will be how you can extract value from the deal to meet your needs in retirement without putting excessive pressure on the business.  Obviously you want your son or daughter to be hugely successful – to earn as good a living as you have.

One issue than can complicate any family business succession is how best to treat other family members that do not wish to take an active role in the business.  This is a very important issue, but for the sake of simplicity, it will have to be dealt with in a future blog post.

For purposes of this discussion, I assume that you have a current valuation of the company, hopefully prepared with the assistance of a business broker, a CPA and possibly a certified business appraiser.

Purchase a legal ownership interest.  The majority of the businesses we see are either an S Corporation or a limited liability company (LLC).  Both of these legal forms have many beneficial characteristics for private businesses.  Nevertheless, any transfer of ownership between people must be legally documented with the state of organization and also on income tax returns. 

Sale or issuance of shares in an S Corporation is pretty simple, which is one of the best benefits of this entity type.  A new interest in an LLC is a bit less clear, but can be quite simple as well.  Both acquisitions can be accomplished as a direct transaction between owners, or as a transaction with the existing legal entity.  Be sure you understand the tax ramifications of each alternative – they differ drastically!

Also, keep in mind that it will be necessary to allocate the activity for the tax year to properly share and report the taxable income or loss to each owner at tax time.

A Few Alternatives

Parent Funded – This approach has a number of positives in that it can be simple and inexpensive to put in place.  An installment agreement will also spread any tax gains over the multiple years of repayment.  The payments of principal and interest will provide a stream of retirement income and the terms can be set to ensure business cash flows are not crippled.  This alternative may not be feasible when you need to liquidate a liability, or otherwise need a large upfront cash payment at the time of the transaction.

Bank Borrowing – You’ve likely developed good banking relationships over the years.  A banker that knows you and your business, and also knows your successor, may be willing to fund most of the transaction.  Conventional lending has been very hard for obtain for all business owners over the last few years, but it may be available as part of a larger acquisition funding plan in which only a portion of the repayment plan requires borrowed funds.

SBA Funding – About the only bright spot we’ve seen in the capital markets over the past few years has been a more streamlined focus on small business needs by the SBA.  The SBA exists to support businesses that create jobs.  The SBA will lend to a child wishing to succeed a parent in a business.  They do have a couple of rules that must be clearly understood: 1) the child successor must acquire 100% of the business, and 2) the parent must not be employed or remain active in the business after the transaction. Ouch.  I suppose these rules stem from past abuse of SBA lending.  If you can work with these demands, SBA lending is a very good way to go.

Segregate Real Estate – It may be possible to hold or transfer any real property, facilities and improvements into a separate entity from the operating business.  In this way, you will continue to own the real estate portion and earn income through a lease on the facilities.  This might be your primary source of retirement income.  This should result in a lower acquisition value of the business assets and thus it may be easier for your successor to handle the purchase of the stock or member interest. 

This approach also allows you to postpone the purchase of the real estate to a future period, and it may also fit nicely with your overall estate planning.

Key Man Life Insurance – Under this approach, you might issue one share in the S Corporation to your son or daughter, with you retaining the rest of the ownership interest.  The child assumes operational control and earns an appropriate salary for doing so.  You continue to earn an annual stream of income from the business, which essentially becomes your retirement. 

You can continue to share in the operations, but scale back the hours.  Focus on your best customers! 

A life insurance policy is purchased that will cover most of a predetermined stock purchase transaction upon the event of your death.  If the insurance policy does not quite cover the acquisition price, your agreement provides for a note for the remainder to be paid either to your surviving spouse or to your estate.

The acquisition transaction can be effected either through a stock redemption, so that your child is the only remaining shareholder, or it could be an outside transaction between your surviving spouse or your estate.  If properly structured, there can be some tremendous tax efficiencies to this approach.

Most key man policies are term policies, and if you’re in good health, the premiums can be fairly reasonable.    Don’t ignore the use of a whole life policy for this approach.  We have seen them used effectively, both owned by the business entity itself, or owned by the acquiring successor personally.  Tax advisors get pretty worked up about the lack of a tax deduction for company owned life insurance, but when considered economically, the benefits to a whole life policy can outweigh the loss of a tax deduction.  If fact, the cash surrender value may seriously strengthen your balance sheet in the eyes of a lender.

We’ve just briefly whipped through some very different alternatives, haven’t we? One thing is certain – if your kid wants to take over your business, we can find some combination of planning ideas to get it done. 

Start Your Own Central Intelligence Agency


Bruce Swabb, CPA

How do you make business decisions these days?  Most of us work in the “AGFZ” or the anecdotal gut feeling zone.  Truth is, we operate pretty well in the AGFZ.  The bank account is in good shape and business is consistent, even if it’s not growing as fast as we think it could.

But what if we decide to get strategic?  Clearly governments and even big business understands the need to gather key information so that they can make critical decisions to solve the most important issues they face.  I think it is extremely important for you to have the same level of critical data for your business.  No small business can stand to waste capital by spending it in an unproductive way.

A Challenge: Define four key data points that will give you the competitive information you need to make strategic and tactical decisions. 

Some examples:

Who are your competitors? Study your local and national competition.  Honestly assess the things they do better than you do, and likewise, note where you have a better process or product.  Can you pinpoint where and how they market to your shared customer base?

Find companies in other industries that impress you and see if there are ways to duplicate their best practices.  Take a look at Chik-fil-A.  They have taken the fastfood model and improved it so much they can afford to close on Sundays!

Competitive Pricing – It is obviously a no-no to collude with your competitors when setting pricing.  But it is essential to know exactly where your prices are within your competitive market. A marina client of ours is expert at this.  He always knows what the marinas in the region are charging for slip rates and fuel and stays just under the two highest in price.  It sounds simple, and it is. You are not looking for a price war, so be careful not to get caught in a downward spiral of competitive pricing.

Regularly Ask Your Customers – I love Survey Monkey.  What a powerful tool! It is easy to set up and it will make your customers feel more connected to you and your company.  Ask your customers about your products and service.  Ask them for improvement ideas.  Give them a way to respond and interact with you.  You will be amazed at the instant goodwill you can create by being accessible.   You will gain some very useful information.

Here is a link to an article on what kind of data you can gather from your customers. For a starter list questions you might ask see this discussion of 20 questions for your customers.

Who the heck are your customers? –  The goal here is to describe your ideal customer.  Where do they live?  What is the range of their disposable income?  How do they make the decision to buy your product?  Where does your ideal customer spend their leisure time?

Are Your Vendors Good to You? – It kind of hurts when you ‘ve been loyal to a vendor for the past ten years and you discover that you’re paying significantly more than newer competitors.  Stay loyal, but regularly test the waters by getting competitive quotes from other vendor options.  Then give your favorite guy the opportunity to keep you as a customer.

Enlist Your Employees – Get your team involved in the intelligence gathering and delegate the tracking of the information.  Create a set of competitive benchmarks and how your business stacks up in the comparison.  My wife teaches high school and she uses some really fun new software apps to gather, test and interact with her students.  The kids eat it up and love to earn points and track progress.  Smart business owners can use these tools as well, especially for process improvements and training.  Make them earn that secret decoder ring!

How Will You Use This Data?  Once you get into the habit of gathering data that matters to your business, you will be in a much better position than you were when you operated in the anecdotal gut feeling zone

Your long term strategic goals (“the what”) will almost draft themselves, as the data makes your path and your longer term goals clearer. 

Putting plans in place to achieve “the how” or the immediate discrete steps toward achieving some strategic goal is known as tactical planning.  By learning more about the best practices of other companies, and by engaging your employees, you’ll be able to better define and implement your tactical plans.

If it helps you bust out of the AGFZ, envision yourself as Sean Connery or Daniel Craig.  You will take your decision making to the next level rather than the random way we make decisions today.  And you will look damn good while doing it.

"Must have" spy gear

"Must have" spy gear

New PaintJob

New Paint Job.JPG

Bruce Swabb, CPA

I’ve been a business owner long enough to really appreciate when I see another small business with sparkling work vans and trucks, or a well-appointed office.  I know that the owner of that business held back cash from her own pocket to maintain a high quality appearance for her business. One of the many sacrifices.

The past few years have been tough on most business owners.  Each of us have had to be careful with the allocation of cash due to economic uncertainty.  As we slowly emerge from the slowest economic recovery in the past fifty years, it is time to consider catching up on deferred maintenance.

Do you have a list of priorities for repair and maintenance needs?  Would you like to put on a pretty face to the world, but felt that you couldn’t afford to make the investment?

Your customers are judging you and your business constantly.  It is very important to project quality and confidence in everything you do.  In everything the customer sees.

Furthermore, if you are thinking about selling your business in the next couple of years, it makes financial sense to invest in the customer facing appearance of your company.  And it certainly makes sense to keep all your equipment in good operating condition.

So where will you get the capital?

Traditional bank lending has been very hard to get – unless you had so much cash on hand that you didn’t need a loan in the first place!  Very sore subject indeed. 

Dick and I were not big fans of SBA borrowing in the past, but after 2008, it is the most prevalent source of capital for businesses.   Fortunately, the current SBA programs are much more flexible than in our past experience and certain lenders can put a loan package together in four to six weeks.

The SBA has several loan programs – 7a, 504, Express Line of Credit and Microloan.  I’ll write a blog post with more details on the various loan programs.  We’ve found their interest rates and terms to be reasonable and have assisted our clients in financing new production molds and a partner buyout.

The American economic engine is still at half throttle, but we are confident that once the barriers to business are corrected over the next few months, the economic engine will roar to life with surprising speed.  In the meantime, think carefully about giving your business a new paint job and mechanical tune up to be ready to hit the accelerator.

Pigs Get Fat, Hogs Get...

Hogs Get.jpg

You can take advantage of a rare tax benefit as owner of an S Corporation to reduce self-employment tax.  Just don't overdo it!

Bruce Swabb, CPA

A few years back, I was working with a client to determine whether they should set up their new business as a limited liability company or a Subchapter S corporation.  I had worked with both entity types for many years, but the lightbulb finally lit up for me that the PRIMARY reason for selecting an S corporation was to reduce self-employment taxes on owner income.

What a great planning opportunity!  But, as the title to this post hints, you can take the tax break too far and end up in trouble with the IRS.

A little bit of background

Both an LLC and an S Corp are pass-through entities.  Meaning the company itself does not pay income tax, but passes all earnings through to the owners (members or shareholders) and the income is taxed only once for income tax purposes.  This is reported to you each year on a form called a Schedule K-1.

A big difference between the two is that pass through income from an LLC is subject to self-employment tax.  The first $118,000 of the income from your LLC is subject to self- employment tax at a rate of 15.3%! Anything above $118,000 continues to be subject to Medicare tax.

An S Corp allows you to treat yourself as an employee and earn a salary.  This salary is then subject to payroll taxes just as any other employee of the company.  You still effectively pay the 15.3% rate – because you are paying both, the employee and employer share of the payroll taxes. 

The cool part though, is you set your salary at a reasonable amount, with no direct relationship to the net earnings of the business. You pay payroll taxes only on that salary, not the entire earnings of the business.

A quick example - the business throws off net earnings before your compensation of $100,000.  Under the LLC entity, this income would result in self-employment taxes of $15,300.  Yikes. 

Now, let’s say you pay yourself a salary of $50,000.  You will pay payroll taxes on your salary, and you can also have income taxes withheld from each paycheck.  The Social Security and Medicare taxes from your salary will total $7,650 for the year.

The salary you pay yourself is a tax deductible expense at the S Corp level and it reduces the net earnings reported to you on Sch. K-1.  In our example, you will pick up the salary as wages reported on form W-2 and the remaining $50,000 pass through income as reported on the Sch. K-1.  So, you still take the full $100,000 into income for income tax purposes.  Remember - we are talking about self-employment tax, which is a payroll tax. This $50,000 of Sch. K-1 pass-through S Corp income is NOT subject to self-employment tax.  In this example, the S Corp results in payroll tax savings of $7,650 versus the LLC.  Not chump change.

I have no idea how or why this different treatment came about.  It may have simply been an oversight.  I know that Congress is well aware of the benefit, and has declined to repeal it.

Now for the part about the Hogs…

As mentioned above, Congress is aware of the benefit.  And the IRS is aware of the benefit – and the IRS is not happy about it.  When the hit to the Treasury came to light, the IRS tried earnestly to get the law changed and to strong arm business owners into paying the full self-employment tax on pass-through earnings.  The courts have beaten back the IRS and protected taxpayers when reasonable compensation has been reported on tax returns.

The IRS doesn’t go down without a fight…

After failing to get the law changed, the IRS began specifically screening the Officers Compensation line of S corporation tax returns, form 1120S, to select audit candidates.  Guess what? If you have been a hog and reported either zero compensation, or a ridiculously small amount of compensation, you are a strong candidate for audit.

The wise approach is to pay yourself a reasonable annual salary.  Enjoy the benefit, without overindulging.  I counsel my clients to think about a monthly amount that is more than enough to cover their monthly living expenses plus a chunk for entertainment.  It will be hard for the IRS to get too rough with you under this approach, but of course, they can propose any adjustment they desire.

If you find yourself in this situation, have a discussion with your tax advisor.  The potential audit assessments can be quite large – the part where the hog gets slaughtered.  If the IRS decides to go after you on this issue, they are going to propose that all of your pass-through earnings should be treated as compensation. 

If instead, you take a reasonable and consistent approach, you can enjoy a very rare tax benefit without getting smoked and slathered with BBQ sauce by the tax man.

Buyer Expectations

…are unreasonable!

I remember when I needed to put my big beautiful sailboat up for sale. I assumed I could simply point out the items that required repair, and be willing to adjust the sales price to accommodate the repairs.  My wise old boat broker quickly put that notion to rest, telling me boat buyers will demand a perfect boat.  Gulp.  Boy, was he right.  And I still had to adjust the price to get a deal done. 

Here she is…I sailed her many thousands of miles. She kept me safe.

You’ll be in the same situation when selling your business.  Let’s make sure you are prepared for buyer demands, both administratively and psychologically.

Some areas to consider:

  •  Labor – Resolve any internal workforce issues or disputes, and ensure that your buyer is aware of anything that remains open.
  • Books and Records – General clean up and proper classification of financial statements.  Pay particular attention to the accuracy of Accounts Receivables and Payables.
  • Sales Taxes – Ensure all sales tax returns are timely filed and your sales tax process is audit ready.  A buyer will expect indemnification for any liabilities that may arise after purchase.
  • Customer and Vendor Relationships – As trying as it can be, keep your customers and vendors smiling!
  • Deferred Maintenance – First impressions are hard to change, so make sure your facilities are clean, and spruced up.  Any equipment issues will be discovered during due diligence and repairs required.  Never give a buyer the impression that the business is out of control.

Get ahead of buyer expectations by closing up the loose ends – you’ll sleep well at night and be in a much stronger position to resist downward pressure on your sales price.

Bruce Swabb, CPA

The Biggest Pile of Cash - A Rare Bird

Bruce Swabb, CPA

It has been said that the time to plan an exit strategy for your business is the day that you start the business. In this is the final chapter in our series of posts focused on developing exit strategies I’ll describe a very rare bird  – the business owner that recognizes a need to craft an exit strategy many years before the expected transition event. 

As business brokers, Dick and I want to sell your business -  duh!  But we also want to develop a long term relationship with you many years prior to selling your business.  We have much to offer in addition to our brokerage activities.  Such a working relationship ensures you’re emotionally ready, and most importantly that you will reap the financial reward you require after selling your business.

This post describes a long term thinker.  She runs a successful business generating a couple hundred thousand in surplus cash each year.  With kids entering college, it is time to start to focus on retirement. She expects to continue running the business for another fifteen years or so.  Boy, do we love to find these owners when they are 45 to 55 years old, as it opens up so many more planning opportunities!

With a 15-year time horizon, she can clarify and plan for several important needs: fund family education and daily lifestyle; ensure a comfortable retirement income stream; have a contingency in place in case of death or disability; develop a key person or team to operate the business, and have the business in strong condition and ready to sell when the time is right.  Sounds pretty good doesn’t it?

To achieve the feats in the previous paragraph, quite a few professional disciplines come into play, such as accounting, estate planning, insurance, taxation, personal financial planning and of course legal.  Attempting to create your own team by engaging each of those professionals separately would be no fun at all.  In fact, that is a big factor in why most business owners simply put this effort off until another day – which never arrives.

Let’s unpack that 15-year plan above and take a look at its parts.

Initial Vision and Endgame.  

If you were planning to sail a boat across the Atlantic to Gibralter, you would chart the course in advance, and likely plan a stop in Bermuda and the Azores along the route.  You would constantly check your course and position along the way to ensure you were heading toward your ultimate goal. Your course will be affected by outside forces, such as strong currents and heavy weather.  But as a competent navigator, you check your position every half hour and adjust course to ensure you are efficiently making progress to your target.

Deciding where you want to be after 15 years in business is no different.  You simply need to define what you want and lay out a general path to get there.  One thing is certain, without marking your ultimate target, you won’t end up there by accident or luck.  Write your end goal on a piece of scratch paper.  Think about it. Stew on it. Modify it. Don’t worry about getting it right the first time. Once your target is defined, the currents and tropical storms of daily business will certainly create course corrections each year, but the fact that you’ve defined a target will guide you in how to make those corrections.

Cashflow Management.

To achieve your vision, you must carefully allocate the free cash flow generated by your business toward three areas: 1) capital needs of the business; 2) current disposable income, and 3) a source of retirement income.  This “three-legged stool” will not support you if any one of the three financial needs are starved. Steady investment in all three areas are required to maintain balance and a solid foundation.

Contingency Planning

How will the business survive if you or your partner become disabled?  The short answer is always key man insurance and a buy/sell agreement – which we HIGHLY recommend.  But there is also the human resource side of the equation.  Somebody had better be ready to step into your shoes to keep production flowing and customers satisfied.  You must ensure there is sufficient cross training at all levels within the business – and that includes your position.

Succession planning

Every parent nurtures the idea that someday, their kids might take over the company.  For a number of reasons, it is very rare that children and family members actually WANT to, or have the skills needed to take over the business.  Realistically assess your situation and begin developing your successor.  It is more likely that there is a promising key employee that can be groomed to lead the company.  One important planning aspect will be to devise a way that this key person can finance the eventual purchase of the company.  Several ideas can be implemented to position the person to buy the company from you or your heirs.

Retirement Funds and Insurance

As mentioned in the Cashflow paragraph above, your plan will include regularly investing free cash flow for your eventual retirement.  There are so many vehicles available that you will need sound advice on which investments best fit your needs and risk profile.  The tax ramifications of each investment can create big differences in the final pile of cash you have to work with each year.

One vehicle that is often overlooked due to the mainstream focus on tax-deferred investments, is a good old fashioned equity based life insurance policy.  These can be owned in a number of different ways, but if carefully designed, such a policy can accumulate a very nice nest egg. And these policies can be used to provide a tax free stream of income while you are alive (much like an annuity, but most tax efficient) and still provide a death benefit to support your spouse after your death.  Such a policy can provide shelter from stock market volatility and can also be used as collateral for business borrowings.

Maintain Readiness to Sell

The greatest aspect of such thoughtful forward planning is that you are never precluded from selling your business at any time.  By keeping your business in a state of readiness for market, you can act decisively when a really good offer pops up.  With your ultimate goal still in focus, if a deal you can’t refuse presents itself, you will know that it is the right course of action.  Your business will attract a high market multiple and because you are ready for the due diligence process, the transaction will likely close fairly quickly.  How powerful is that?

Thousands, of business owners are being under served. They struggle, on their own, to solve their planning, investment and exit strategies without experienced guidance.  This results in very mediocre results when it becomes time to sell their businesses.

We’ve developed a team of professionals in one shop that have the experience to help you plan and ACHIEVE each of the long term goals noted above.  

Are you one of the rare birds? If you are a long term thinker and open to new ideas, we can do great things for you!


photo credit: <a href="">Colours of Africa</a> via <a href="">photopin</a> <a href="">(license)</a>

Harder to Keep up the Pace

Getting ready for another lap around the track

Getting ready for another lap around the track

Bruce Swabb, CPA

In this third segment of our exit planning discussion, I’ll share some thoughts and insight about the “middle” stage in the progression towards retirement from your current business.  In this stage you have been operating your business successfully for a number of years, but more and more, you are wondering how much longer you are willing to keep plugging away.  If cornered on the subject, you would say that you’d like to sell the business within 3 to 4 years.

With a 3 year planning window, you have a couple more options than the chap we discussed in my last post who was out of gas and out of time.  With a more relaxed time horizon, we can make your business shine!

Maintain Control – A very important element in selling your business is maintaining control of the process.  If you have a more relaxed time horizon, you can dictate the pace of activity and will be in a better position to negotiate your most important terms with buyers.  When the best prospect comes along, you can act decisively.  Do not let buyers hijack the process! 

Refine Market Value – As you set your sights on an eventual sale of the company, every strategic decision should be designed to enhance its market value.  Most valuations will be based on a weighted average of the previous 3 year’s activity.  As brokers, we are very actively involved in assisting our clients in determining market value and setting a pricing strategy.

Head Start on Due Diligence – Selling your business the correct way takes a bit of time and a methodical action plan BEFORE placing the business on the market.  Many of the warts can be minimized or eliminated, your financial records can be cleaned up and properly classified, and you can prepare a thorough information package in advance, so that all you need to do is provide a PDF presentation to prospective buyers.  Professionalism! This approach will generate a much higher level of respect from buyers.  They will be less tempted to go the “low-ball” pricing route.

Another Option Does Exist – And you still have time to set an alternative to selling in place.  What if all our homework leads you to the conclusion that after transaction costs and taxes, the net cash from the sale of your business is less than you expected?  What if it is downright unsatisfactory?

With a 3 to 5 year time horizon, there may be an alternative in which you organize your company so that while you continue to own it, you have a managed transition to a lesser day-to-day obligation.  Hey! A vacation is an option! And you might be free to focus more on your most important customers!  Meanwhile, the business continues to provide a stream of income for you.

As part of the "American Dream" I referred to in our first post on our exit planning excursion, we have been conditioned to believe that private businesses must be sold to reap the final reward for all of our hard work.  The reality is that the biggest benefit your business has provided is the stream of income that it has ALREADY paid you over the years.  Once sold, the net cash from the sale of the average business only provides a few short years of cash flow!  Maybe I'm wrong, but I doubt you plan to get a part-time job after selling your business.

Now, this idea of reorganizing your business to enable you to essentially retire, and using it to provide a continuing cash flow for your retirement years deserves its own blog discussion.  But the key point is that by thinking about these issues just a few years before you intend to sell – or do something – you have the option.  Develop the idea, and then quantify the potential result.  Then you will be in the position to choose the better path.

A quick look back at the options that should fit with your 3 to 5 year time horizon:

  • A traditional sale, but with an excellent action plan to prepare and maximize the market value of your company;
  • And we’ve also contemplated whether a sale is the best option for you. We planted the seed for how you might create a stream of cash flow on into retirement.  The vast majority of business owners don’t realize that this option might exist, and virtually no business brokers will pose the idea!

In my next post I'll discuss the options available to that very rare bird who puts an exit strategy in place waaaaay before the target transaction date.

Out of Time and Out of Gas

...are you in this Seller's situation?.  

A Compelling Cause - This post describes a situation in which a business owner comes to the immediate realization that they must sell the business NOW.  They have dedicated all energy and financial resources to the business and it has provided a good living for them, but something has occurred which trumps all other potential choices.  The catalyst may be a health issue, an upcoming balloon payment on a note, the loss of an important customer, or simply age. 

Out of Gas - Regardless of age, young or old, the person in this predicament is always exhausted from the struggles of running the business.  When the final straw occurs, the need to sell the business becomes the only apparent source of relief.

Out of Time – In diabolical partnership with the lack of energy needed to continue the daily battle of running the company, there is a time constraint looming which creates urgency.  You are working against a ticking clock.  Talk about stressful!

Tilted Playing Field – Unfortunately this seller finds himself at a disadvantage. A buyer will have a huge advantage if they are aware of any constraints.  A certain amount of confidentiality can be maintained through the process, but an astute prospect will quickly ascertain the general circumstances and devise a purchase strategy to put pressure on the seller. 

If A) there is no key person to tend to the business while dealing with the crisis, and B) there is a fast approaching time deadline, you will be forced to offer your business at a reduced price.

What are your choices? You will need to be decisive in order to put an action plan in place quickly.  The good news is you are an expert at crisis management!

Seek an Advisor – You must find an independent advisor to listen to the problem and be a sounding board for the solution.  There is no certain professional or person for this. Trust, judgement and independence are extremely important.  You may turn to your spouse, another respected business owner, and possibly a CPA or an attorney.

I’ll bet you raised your eyebrows in surprise at my tepid promotion of seeking advice from a CPA.  CPA’s are often quite cautious, even reluctant, in playing this role.  By all means, hire a CPA to understand the financial realities of the situation, but unless you have had a long history of working through business issues with your CPA, find another advisor to think through the plan of action.

Professional Marketing – Your most likely scenario is to sell your business and sell it as quickly as possible.  You will need to select a business broker who can get you to market and generate a wide audience of appropriate prospective buyers.  Should you attempt to sell your business on your own, the time clock will quickly run out, and you most certainly will not maximize the potential value for your business. 

Two other potential options are: 1) to develop a key person who is capable of operating the business effectively, which may relieve enough pressure on you to enable you to recharge your energy, and still provide positive cash flow for your living needs, and 2) to approach your bank for an interim solution to the pressing time constraint. 

On the other hand, if either of these two options were viable, you fall under the scenario I’ll discuss in the next post: Keeping Pace is Getting Harder. How Much Longer Do You Want to Keep Up the Good Fight?

If you find yourself in this “Out of Gas and Out of Time” category, the time for action is now.  Seek out your trusted advisor – and of course, we are happy to support you in the process.

The Biggest Pile of Cash - Part I

Which choice leaves the most net after tax cash?

Which choice leaves the most net after tax cash?

Bruce Swabb, CPA

You’ve got a great business that you built brick by brick over the past couple of decades.  A big part of the “American Dream” that drives entrepreneurs is the final payoff for all the hard work.  Someday, you expect to sell your company and start having some real fun.

Some think ahead and develop both Plan A and Plan B, just in case reality takes an unexpected right turn.  Others keep plugging away focusing on the current day-to-day operations – and keeping those customers happy!  For the latter majority, they understand the need for planning their exit strategy, but they also assume that there will be a time for that planning later. The rare bird indeed, actually sets a strategic plan in place years before the expected exit.

Now for the sad story.  We work with business owners every day who haven’t prepared for the sale of their business.  They begin to realize that it is time to sell their business, and sooner rather than later. 

One of the hardest aspects of being a business broker is having to explain to a business owner that they are not likely to get what they had expected for the sale of their business.  It is truly a big shock.  The saddest part is they’ve lost the planning years which could have been used to develop a happier result.  They are out of time, and have no options. 

Dick, Rich and I love to help people sell their businesses, and we work hard to maximize the realized cash value of your business.  But what we really love to do is to work with you soon enough to let you choose between a couple of alternatives. Obviously, you get to pick the alternative that leaves you with the biggest pile of after tax cash.  We can help you design strategies that are good for you, good for your family and good for your employees.

Over the next few blog posts, I’ll lay out some ideas for business owners in three different circumstances of ownership:

  • Out of time and out of gas.

  • Keeping pace is getting hard. How long can i keep up the effort?

  • The kids are in college and business is humming right along. 

The Ten Commandments of Selling Your Business

Bruce Swabb, CPA

  1. Thou Shalt summon the discipline to report all cash receipts to preserve the power and the glory of your business.
  2. Thou Shalt begin to prepare at least twelve months in advance before placing your business on the market.
  3. Thou Shalt clean the closets of thy books and records to root out all vermin, omissions of debt and misplaced entries.
  4. Thou Shalt not attempt to tread this path without professional guidance. 
  5. Thou Shalt not demand an exorbitant price beyond the heavens.
  6. Thou Shalt not hurl objects at your business broker when he attempts to speak the truth.
  7. Thou Shalt faithfully file all income and sales tax returns and avoid lurking tax liabilities.
  8. Thou Shalt maintain financial reports that give a clear reflection of your business activities and history.
  9. Thou Shalt maintain angelic patience and speak kindly to all who have shown the slightest glimmer of interest in your business.
  10. Thou Shalt not change your mind and decide not to sell after receiving a reasonable offer.

Follow this hard earned wisdom and your path will be harmonious.




Can you sell your own business?

Bruce Swabb, CPA

It isn’t particularly hard at all, if you can devote the attention to meeting with potential buyers, you are satisfied with a potentially long listing period, or you can live with settling for a lower price for your business.  It is fairly rare for business owners to attempt to sell their own businesses.  This is a far cry from selling a home or even commercial real estate.  

I’ll outline 4 key things to consider:

Setting Market Price

A key factor in the length of time your business sits on the market is setting a reasonable price in relation to the potential investment return to a buyer.  Most business owners are shocked by the actual market value of their business.  If you are fortunate enough to attract serious prospective buyers, you will very quickly learn the price the market is willing to pay.  Consider a fee based business valuation in order to set a fair market price.  An unreasonable price will simply get your business ignored by serious buyers.

Getting Attention

There are a number of alternatives for telling the world your business is for sale.  The old classified ad approach has become a thing of the past due to the rapid decline in traditional newspaper readership.  We used to have great success marketing businesses in the Thursday edition of the Wall Street Journal, but we’ve come to the conclusion that it is no longer effective – and it is exorbitantly expensive.

Craigslist seems like a no-brainer - until you have to interact with hundreds of completely undercapitalized prospective buyers.  Craigslist is for selling your old camper top, not your business.

Another alternative is to place listings on the web with Loopnet, or other websites specifically created for buying and selling businesses such as BizBuySell or BizQuest.  These sites all charge a range of fees, but in all cases, to properly showcase your business and drive eyeballs to your listing, you will need to make an investment.  It isn't unreasonable to spend $1,000 per month to market your listing.

Much like MLS listing services, professional brokers have subscriptions to these sites that give them a far wider audience than the FSBO seller.  For instance, it is said that a FSBO listing is exposed to only 2% of Loopnet visitors.  Seems unfair, but you have to pay to play.


I don’t care who you are, a buyer will have leverage over you in negotiations.  In our experience, the buyer is looking at several potential investments and they are quick to move on.  Are you able to dispassionately negotiate a deal?  Will you stay clear headed enough to ensure key points are included in the deal?  It isn’t as easy as it seems!

Deal Structure and Due Diligence 

Make sure you clearly understand your legal and tax structure and your cost basis in the business.  There can be a huge difference in the tax bill depending on how the business sale is structured.  What is good for the buyer is often not the best answer for the seller.

Due diligence is intrusive. Any buyer will want to tear apart your books, talk to your employees and customers, and ferret out anything that could lead to liability once he or she takes over your business.  You may need to have an environmental or structural engineering study performed.  Most buyers want to see three years of financial information, including customer lists and rent rolls.  Needless to say, due diligence can be an exhaustive process and a big distraction if you are heavily involved in the day to day operation of your business.  It is particularly heartbreaking when you've busted your tail to meet a long list of information demands and a buyer pulls out of the deal because you were not prepared to explain every aspect of your business.  Buyers will have an option to kill the deal until they have completed this process.

No Shame in Calling for Help

The desire to avoid a broker’s commission in understandable, but keep in mind that professional help will more than pay for itself in generating more net dollars to you than the cost of the commission.  And a broker should handle most of the details of marketing and due diligence so you can keep running your business right up to the closing.  Up to 80% of FSBO's eventually get listed with a broker.

Now excuse me while I attempt to replace my air conditioner.  I’ve been watching a bunch of Youtube videos, and it looks like a cinch!

Is Quickbooks Killing Your Business?

Bruce Swabb, CPA

Of course not, but with millions of users, what may be the most important small business software of the last quarter century can set you up for failure. 

In fact, the software seems so intuitive and easy to use, that many business owners are lulled into a serious long-term mistake - they dismiss their bookkeepers.

Think about it - If you are hoping to sell your business or borrow from a bank, the credibility of your financial information is extremely important. 

And if you are thinking about capital expansion or a new line of business, you'll want useful information, won’t you?

The developers at Quickbooks and the host of new competitors such as FreshBooks and Xero work hard to give you an intuitive easy to follow interface.  They've also done a good job of building company templates which closely fit your industry, whether a restaurant or a construction company.

But the hand holding only gets you started.  Partnering with a bookkeeper will ensure you get your company set up correctly – in a way that will lend credibility AND give you key insights for strategic decision making.

2 Financial Ratios You Must Know



Cash Flow Roller Coaster

Most small businesses have seasonality or peaks and valleys in their cash flows, which demand that you plan ahead to avoid a cash shortfall. 

Are your current results skewed by seasonality or a special circumstance?  If the results show a need to achieve better cash strength, you may need to consider special cash flow budgeting and how you can obtain short term working capital.




Signals of an Unseen Problem

Your business may be strong as an ox, but what if you had a ratio that could give you an early warning sign that you were headed for financial trouble?  Business owners who’ve taken their companies through bankruptcy certainly wish they’d had a way to see their problems while they had time to respond.  The Cash Flow to Debt Ratio is an important ratio for gaining an advance warning that you need to make strategic changes and prepare for rough financial times. Experts tell us that this ratio can predict trouble up to 3 years prior to bankruptcy. 

This is an important indicator of your company’s ability to pay its principal and interest on debt through the cash generated by operations, or in other words, it shows you how long it would take to pay off all your debt if all cash flows were dedicated solely to debt repayment.

The thought of a discussion of financial ratios sends most business owners fleeing.  So, go for a quick jog around the office.  

Now gather your composure and give me 5 minutes.   

You need this and I’ve made it easy for you by focusing on the two most important ratios to gauge the health of your business.  If you’re arguing the point, then you like financial ratios and you don’t need this advice!

As a busy business owner, your primary barometers may be “gut feel” and the cash balance in your operating account.  And your gut feel may not be wrong, but with this approach, you really don’t have enough information to adjust your activities.  No benchmarks.  

Let’s take the effort up just one notch, and in so doing, give yourself the ability to see cash flow problems before they become difficult to manage.  The two ratios I’ll share are the equivalent of shelter and food in Maslow’s hierarchy of needs.  You have to survive before you can thrive.  

Quick Ratio.jpg

The Quick Ratio is the first financial ratio you should become familiar with, and is very simple to compute.  This ratio tells you whether you have enough cash or assets that can be quickly turned into cash in order to cover your day to day operating needs.

...can signal financial distress while you still have time to respond.

...can signal financial distress while you still have time to respond.





 An impending loan maturity date must be taken into account, as the ratio assumes ratable principal payments rather than a one-time balloon payment.