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Business owners spend most of their time on operating and expanding their enterprises. Many entrepreneurs think that when they retire, they will sell their businesses. Unfortunately, most businesses are not sold.
In many cases, the owner sells the assets and winds the business down or works until death. We all will exit our respective businesses whether voluntarily or involuntarily. Here are three ways that an owner can successfully exit their businesses.
An ESOP or Employee Stock Ownership Plan is one of the most equitable ways to exit a business. An ESOP is similar to a Profit Sharing Plan. It allows employees to participate, directly, in the financial success of a business. Under this structure, the company can use pre-tax future earnings to purchase shares from the owner. The plan can be funded with a lump sum or a periodic payment. An ESOP is a tax efficient way for an owner to exit their business.
The second way that an owner can exit a business is through the sale of the company to a strategic buyer. A strategic buyer is usually a competitor or a company who is looking to add to their customer base, product line or market share through an acquisition. Generally, a strategic buyer will pay a premium for a company to increase their competitive advantage.
Financial Buyer (PEG/PIG)
An owner can also turn to private equity or private investment groups to exit their business. These financial buyers are primarily interested in increasing revenues and reducing expenses to maximize the value to the business. Their goals are to make a profit for their investors. A financial buyer can close the sale and put money in the owners pocket relatively quickly.
Developing an exit plan should be a priority for any business owner. A proactive business advisor, financial planner, or mergers and acquisitions (M&A) professional can help you prepare and implement a plan. It is important to consider your how a liquidity event will affect your retirement plan, tax situation, and lifestyle. Once you have a plan in place you can concentrate on what you do best-building your business and serving your customers and community.
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After the credit crisis in 2009, financial institutions were forced to shore up their reserves and tighten their lending requirements.
The unintended consequences have been severe. Only the largest and most credit worthy businesses have been able to access capital. Small businesses have had to turn to nontraditional lenders who charge higher interest rates and more fees than traditional banks.
Fortunately, there are options that businesses can use to secure financing. Here are three alternative solutions that business owners can tap into.
Community Development Financial Institutions, or CDFIs, are nonprofit or bank sponsored loan funds that exist to stimulate economic activity in underserved markets. They provide technical assistance and advisory services to small and medium sized businesses. Some of the products that they offer include lines of credit, working capital, and equipment financing.
Their interest rates are reasonable and payment terms are flexible.
The second alternative financing solution is factoring, also known as accounts receivable financing. A business can raise capital by selling their accounts receivables, often at a discount, to a factoring company. This allows the business to meet its cash flow needs without acquiring debt.
3. Vendor Financing
A third alternative financing solution is vendor financing. In many industries, a vendor will allow extend credit to a customer to purchase its products. Once the customer sells the products to the end user, the business repays to the vendor. This kind of financing usually carries higher interest rates than bank financing and CDFI loans.
While there have been initiatives to spur traditional bank lending, the small and medium sized business community still struggles to acquire capital. Thanks to these nonconventional approaches, business owners can access solutions that will help to fund their business’s growth.
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Cash flow is the lifeblood of any business. Without it, the enterprise cannot pay its bills, compensate its employees, reinvest in growth, and serve its customers. I’ve encountered many businesses with positive revenue growth but they ended up in the red at the end of the month. Here are three ways that owners can optimize their cash flow to operate and expand their businesses.
1. Track Cash Flow Daily
We live in a data driven world. It is important to know how your business is performing so that you can achieve your organizational and personal goals. The days of tracking your profits and losses in a notebook or on an excel spreadsheet are long gone. There are several inexpensive, cloud based solutions that will enable you to record daily and weekly financial information to keep you on track.
2. Manage High Risk Customers
The second way to optimize your cash flow is to manage high-risk customers. One of the biggest drains on a business’s cash flow is a slow paying customer. You can mitigate this risk by getting up front payments, establishing retainers, and offering discounts to customers who pay early.
3. Segment Your Customers into Tiers
The third way to optimize you cash flow is to segment your customers based on their profitability and average time to pay. I suggest using tiers-green, yellow, and red. While you always want to treat each of your customers well, you want to make sure that you provide your best customers with the highest level of service that you can offer. Separating customers into tiers is the cornerstone of customer relationship management. Our goal is to move customers in the lower tiers, yellow and red, into the highest tier, green. It doesn’t always work out the way we’d like and we may have to fire some customers. And that’s okay. We can only provide the best possible service when everyone in the supply chain is on the same page.
Working with a business advisor to design and implement a system will produce numerous dividends. Once an effective system is deployed, you will receive actionable information on performance and profitability. This data will empower you with the intelligence to make better decisions, reduce costs and maximize profits to reach your personal and professional goals.
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Lately, there has been a lot of discussion in Washington about tax reform. Whether or not Congress is able to compromise on this issue, many business owners will agree that taxes take a significant bite out of their revenue. Here are two ways to reduce your tax liability and reinvest in your business’s growth.
Tax credits for businesses and self-employed individuals are one to reduce taxes. According to the irs.gov, a credit provides a dollar for dollar reduction of taxed owed. For example, every $1 in credits you receive, you will receive a $1 reduction in your taxes. You may even receive a refund if your tax liability is reduced to a certain point. Credits that are available for small businesses include the Manufacturers’ Energy Efficient Appliance Credit and the Plug-In Electric Drive Vehicle Credit.
Deductions are expenses that occur while operating a business. These expenses allow a business to reduce its taxable income.
Some of the ordinary expenses include costs of goods sold and capital expenses. Costs of goods sold, or COGS, are costs associated with manufacturing or purchasing products for sale. These include raw materials, direct labor, and overhead. Capital expenses are investments in your business. They include start-up costs, machinery, equipment, and improvements. There are additional expenses that will reduce your tax liability including rent, taxes, interest, and retirement plans.
There are dozens of credits and deductions that can help businesses keep more of what they earn. With the advice of a proactive tax planner, a business owner or self-employed individual can use the tax code to create jobs, service their customers, and secure their financial future.