HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment managers &
Wealth Advisors
August 3, 2005
This is the August 2005 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
Sooner or
later, everyone wants to retire. But if
you own a family business, retirement isn't just a matter of deciding not to go
into the office any more. If you were
able to save and make sure you’ve got enough money to retire on, that’s
great! If not, the whole question of
what happens to the business when you're no longer running it becomes very
important.
Who's going
to manage the business when you’re no longer there? How will ownership be transferred? Will your business even carry on or will you
sell it?
The good
news about preparing for retirement when you're a business owner: You call the
shots. And, the bad news: You call the
shots.
The issue
of succession planning isn’t limited to multi-national corporations that must
publicly create, communicate and implement plans to satisfy shareholders,
management and other financial community stakeholders. It is also absolutely vital for closely held
business owners.
Why is succession planning often ignored?
The reasons are endless, but typically focus on issues of control,
issues about aging, lack of non-work interests and an inability to let go.
More often than not,
people start businesses for reasons of the “here and now”! Like finding your purpose, being your own
boss, pursuing financial stability or changing your commute.
However, business
owners who create successful enterprises will often find that they have also
created substantial wealth that can fund their retirement – the value of the
business as an asset. Finding the means
to transition from business to retirement is critical, and planning for this
transition well ahead of time – “planning with the end in mind” – is a
fundamental tenet of our concept of wealth management.
As readers of my newsletters well know, wealth management is
the ultimate goal of all that we do at Hoffman, White and Kaelber. Yes, we promote our services; yet, you will find that we
always seek to present thought provoking topics that are relevant to our wide
audience.
In this edition of
our newsletter, I’ve asked Rod Nasbe to outline and discuss how business owners
might think about planning to maximize what might become their most valuable
asset. Rod helps owners rethink business
strategies to better achieve their long-term goals and works with Hoffman White
and Kaelber clients on resolving management issues, including crafting
strategies to prepare their businesses for when they ultimately exit.
Lastly, we will
finish with a review of the economic and investing climate for the month past,
the current market outlook and our investment performance.
Thinking about
retirement
It would be a rare
owner, indeed, who has grown a business over the course of many years and not dreamed
about the day – somewhere off in the future – when they might step away from it
all. Dare they even say the word –
retire.
For some, the dream
is a bit of a fairy tale, since not much concrete thought has gone into
preparing for such an event. “Perhaps a
son or daughter could take over the business?
What if they aren’t even interested?
Have I prepared them to run the place?
Maybe someone will knock on the door with an offer to purchase the
business? Wonder what its worth?”
For others, however,
retirement seems more certain, since having an exit strategy has long been part
of – in fact, the starting point for – the business plan. Furthermore, executing those actions required
to grow the business to the point of exit has been part of day-to-day
operations. And, that includes knowing
who will replace the owners, and when, and how.
If you’re a business
owner and have a notion of retiring some day, there are several important
actions you can take – starting now – to make it all more likely to happen the
way you desire. In this article, we
outline three important steps in planning your business exit strategy.
Step 1. Begin with the end – your business exit – in
mind.
When would you like
to retire? Regardless of how long you’ve
been in business, you probably have some idea of when an eventual exit would be
possible, or desirable. For some, it’s
when they reach a specific age – like 55, 62 or 67. This might coincide with commonly held
notions about when one should retire, or when other financial plans kick in
that make it possible to retire. If so,
then you have an end point in mind. If
not, you should pick an age, an early age, to feed into (or provoke) your planning.
What options are
there for exiting from the business? As
owner, depending on the industry you are in, you may have a broad range of
options for exit or harvest, including sale to, or merger with, an outside
buyer; management buyout; employee buyout; licensing; IPO; or closure and
liquidation of assets.
What actions can you
take between now and then to make the business more attractive to the eventual
acquirer? Regardless of how many years
there are between now and the time you’ve targeted for retirement, there are
actions you can take that will help move your business in the direction of
successful exit. The first is to
understand how your business is valued.
Step 2. Understand business valuation.
What is the business
worth today? If you don’t know what your
business is worth today – what you could get for it on the open marketplace –
you need to find out. Current fair
market value should be an interesting number, whether it’s high, low, or
somewhere in between. Whatever the
number, current value provides a baseline for your thinking and planning.
What do you want the
business to be worth when you retire? If
the business is worth “x” now, and you want it to be worth “10x” when you are
ready to exit, your business plan should be focused on actions that will
increase the value of the business between now and then.
Perhaps even more
important than specific value, however, is the set of factors that influence
the value of your business. Such value drivers certainly vary by industry, and
may vary by market served. These might include long-term sales growth,
recurring revenue as a portion of overall sales, quality of relationships with
key customers, and the value of your brand.
If you know and understand the value drivers for your industry, you can
take actions to increase the value of your business over time.
Step 3. Develop and execute a plan that will increase
the value of the business.
Craft a business
plan. This is your opportunity to
rethink strategy, to question whether the strategy that has gotten you to this point
will continue to take you through the future to successful exit. A good plan will tell a story about the
business, a story that can be used to motivate management and staff,
prospective recruits to your team, customers, suppliers, lenders and investors. While there are many “standard” outlines of
business plans you might follow, we’d like to suggest a set of topics that
should be addressed in any plan you develop:
1.
Pain. What pain, problems, or unmet needs in the
marketplace are you addressing?
2.
Customers. What evidence do you have that customers are
willing to pay money to buy your product or service?
3.
Solution. To what extent does your product or service
address customer pain?
4.
Market. What evidence do you have that the target
market will grow large enough, fast enough, and profitably enough to meet your
goals?
5.
Competition. How well is your business positioned against
the competition to dominate your market segment?
6.
Strategy. To what extent have you developed a focused,
viable strategic direction (or approach) for achieving success?
7.
Marketing & Selling. How effective are
you in taking your product or service to market?
8.
Operations. How efficiently can you make and deliver
products or services to customers?
9.
Management. How experienced and capable is your
management team in being able to execute the plan? Do you have a well thought out succession
plan that would take effect in the event of retirement, disability, or death of
any of the senior leadership team?
10.
Financials. Do you have a solid business model, including
revenue model and profitability model?
11.
Funding. How well do you understand your need for
future funding (debt or equity)?
12.
Exit. Have you identified a clear exit strategy and
a rationale to support it?
One easy and
effective way to prepare a business plan that tells a story is to address each
of these topics on one sheet of paper (or slide). We prefer a landscape orientation that
includes a headline at the top and supporting evidence and graphics below.
Execute the
plan. Given a well-crafted plan that
communicates the owners’ vision of the business, management and staff are
challenged to make it happen. Key issues
for implementation, of course, include keeping everyone on plan, constant communication,
and continuing development of the management team, small groups within the
business, and the organizational as a whole.
One technique we’ve found particularly useful is breaking the strategic
plan down into a set of specific, relevant metrics in each major area of the
business; establishing monthly milestones for each measure; and reporting
progress on those measures at the end of each month.
Follow through. Here we’re talking about the management team
and board of directors holding regular, periodic business performance reviews –
monitoring actual performance against plan (ideally, on a monthly basis), along
with some mechanism for making adjustments to either performance or plan, based
on changing conditions in the business and in the marketplace.
A note about
transitioning from growth to exit strategies
The above discussion
assumes that the owner is several years from retirement and, thus, the business
continues to pursue growth. During this
growth stage, financial goals are focused on tax savings and working capital
maximization to fund growth.
As retirement nears,
the business needs to enter a new phase in preparation for exit. During this grooming period, financial goals
should change to focus on revenue and profit, to maximize pre-tax valuation.
This might be a good topic
for your next regular discussion with your principal advisor at Hoffman White
and Kaelber.
Concluding
Thoughts
Hat’s off to Rod for
doing such a great job at stretching your thinking about business succession
planning!
Succession planning
should form an integral part of any medium- or long-term business strategy, yet
entrepreneurs frequently ignore it in favor of day-to-day financial and
operational issues or sales and marketing activity. Instead of thinking about succession planning
as the unfortunate end of a happy career, it should be perceived as the
pinnacle of achievement: the time when a business owner unlocks the value of
the business s/he has created, is publicly rewarded for his or her efforts and
triumphantly moves on to the next phase of his or her life.
Hoffman White and
Kaelber can arrange an introductory meeting with Rod to discuss your particular
situation and explore ways he could help.
Or, contact him directly at rnasbe@businessbrainpower.com
or 703.980.9110.
Hoffman, White & Kaelber Financial Services Investment
Performance Update
While
the optimism in financial markets looks pretty lofty at the moment, one might
tend to think that there is little risk to consider. Yet, if we look back over the top economic
stories this past month and prior, one can believe that the biggest risks to
growth in the world markets over the near term could be oil prices and the so
called housing bubbles.
So
far, record oil prices (in nominal terms) can be blamed for half to two-thirds
of the deceleration in world growth from 4.1% last year to 3.2% this year. Yet, some parts of the world economy have
prospered, including the energy-producing regions of the
Housing bubbles are probably the
next biggest threat to the sustainability of the current economic
recovery. With few exceptions (
The
The “up-shot” is that current growth momentum suggests that the world economy
will most likely be able to withstand any one of these shocks, without going
into recession. However, if two or more
hit at the same time, all bets are off.
For the month ended July 31, 2005, our
one-month performance is up 1.52%, our year-to-date return is up 2.76%, and our
average annualized return since inception is up 8.71%. While volatility has become exceedingly vigorous
in the equity markets, our
risk profile continues further downward to +/-
5.75%. This conservatively low risk
level remains consistent with our strategy.
With our expectation that this statistic gains increasing importance, our
Sharpe Ratio is more than respectable at 1.23.
Is a comfortable retirement or preservation of wealth important to
you?
Want better long-term results from your investments?
Choose Us As Your Investment Manager!
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