Baltimore, MD – When it comes to preparing for successful business succession, planning ahead is key, according to consultant Dick Baynton, who spoke at the recent Kitchen & Bath Design Expo.
According to Baynton, the best time to make plans for the transfer of ownership of your kitchen or bath firm is no later than three years prior to when you desire to leave. For maximum benefit, “plan when profitability is at its peak, ” Baynton suggests.
First, however, you need to determine the value of your business. There are three approaches to valuing your business, according to Baynton. The market approach utilizes the principle of comparable values, comparing the assets, sales, net worth and earning power of your business with similar businesses in your area that have recently changed hands.
The asset approach involves determining the market value of the clear assets of your company. Marketable assets might include displays, inventory, fixtures, equipment and real estate. The combined total of these assets plus the earning power of those assets equals the value of your business.
The income approach involves looking at your company earnings for the past three to five years, and then evaluating your business’ growth and earning prospects for the next three years.
Once you know the value of your business, you’re ready to start planning for its succession. Baynton cites five options for ensuring a smooth transfer of a business:
1. If the business is marginally profitable, liquidating assets at market value may be your best bet.
2. If a family member is interested, you may be able to plan a transition that allows complete retraining, reasonable financial terms, extended assistance in sales, marketing and operations and a period of transition considering the new burden of debt.
3. A leveraged buyout by employees can involve one or more employees assembling structured funds, with the seller (or investors/ banks) providing the balance of structured funds.
4. A purchase by an employee requires long-term planning, can be leveraged and includes such benefits as productivity increases due to employee involvement.
5. Selling the company outright involves establishing an asking price, contacting a business broker or selling it yourself by contacting competitors, suppliers, customers, investors or employees. Prospects should be evaluated on the basis of their credit history, employment history, skills related to your business and the financial structure of the offer, Baynton suggests.