Survive and Thrive Workshop Series

1. Survive and Thrive Workshop Series Session 6 Business Succession 26 March 2009

2. Workshop Series Hosts • South Dakota Small Business Development Centers (SD SBDC) • US Small Business Administration (SBA) • University of South Dakota • Regional Planning Districts & other Economic Development entities

3. Workshop Series Dates • Where do I stand financially? (26 Feb) • How can I better manage my expenses? (5 March) • How can I increase my sales? (12 March) • How do I manage and improve my cash flow? (19 March) • Should I have a succession plan in place? (26 March)

4. Ready Talk Seminar • For those at host locations, please sign in; for those on individual lines, you have already registered with the SBA • Please note of any questions that you may wish to ask. These will be collected at the host locations, sent via Ready Talk Chat or can be sent directly to jean.rogers@sba.gov

5. Workshop Goals • Improve the viability of your business during this time of economic uncertainty by providing you insight as to your current position and empowering you to make financial and management decisions to increase the likelihood of survival

6. Should I Have A Succession Plan In Place?

7. SUCCESSION …the business continues All businesses are passed-on or pass-away!

8. When current business owners will leave their businesses

9. Why have a succession plan? Preserves relationships Continuity

10. When to plan for succession? NOW!

11. How to plan for succession? Select new leadership/successor Transition Financial planning

12. Selection of New Leadership Qualifications Time Family Issues

13. Family Business Statistics 80-90% of all enterprises are family operations 78% of new jobs are created by family businesses 65% of all wages paid in the US are from family firms

14. www.fambus.org

15. Could this be your family?

16. Transition of New Leadership Training Relinquish Control Communication Exit

17. Some people just don’t know when to exit…

18. Financial Planning for Succession Retain ownership Outright sale How much is it worth?

19. Business Valuations Physical assets Income stream

20. How To Add Value To Your Business Clean books No more “extra cash”

21. More ways to maximize value… • Customer diversity • Management depth • Recurring revenue • Proprietary technology • Penetration of barriers to entry • Effective use of professionals • Product/sales pipeline • Product diversity • Industry expertise/exposure • Growth plan

22. Business Value Killers Poor cash flow Complicated/confusing financials Questionable longevity

23. GOODWILL Sometimes called “Blue Sky” Not easy to value since it is very subjective

24. A Valuation Example with Goodwill Asking Price = $100,000 (What are you selling?) Assume FMV of assets = $60,000 This means the seller wants $40,000 for Goodwill. Is this reasonable?

25. First – Find reasonable ROR on $60,000. • $60,000 x .08 = $4,800 (normal earnings/yr) • Second – Use historical financial information to adjust earnings • Subtract expenses specific to current owner i.e. depreciation, owner draw and other perks AND add in anticipated new expenses • Assume Adjusted Earnings to be $10,000 • Third – Subtract Normal Earnings from Adjusted Earnings • $10,000 - $4,800 = $5,200

26. Fourth – Determine a cap rate • Difficult to determine, but rule of thumb for small businesses should be at least 20%. • Fifth – Divide the cap rate into the excess earnings • $5,200/20% = $26,000 (Goodwill) • Sixth – Add net assets to Goodwill • $60,000 + $26,000 = $86,000

27. Business Brokers Advantages – confidential, you keep focused on running the business, access to qualified buyers Disadvantages – can be costly, not all are reputable, can be hard to find

28. Business Warning Signs Debt to asset ratio on the rise Losing money and losses are increasing Inventory turnover slowing down Unable to raise more money for business Not fun anymore

29. Resources Prairie Family Business Association www.fambus.org Nebraska Business Development Center nbdc.unomaha.edu Small Business Administration www.sba.gov Iowa Small Business Development Centers www.iowasbdc.org

30. Checklist Summary • Start planning for your departure from the business now. • Engage experts to assist you. • Communicate with family members. • Be realistic in valuing your business. • Look for warning signs and try to mitigate them if possible.

31. Checklist SummarySession 1 Do I currently get timely and accurate financials? Am I using Cash or Accrual basis of Accounting? Are there national associations with industry-specific information that I can be taking advantage of? What are my 5 largest expenses? 5 fastest growing? Which expenses are “fixed” and which are “variable”? Where does labor fall for my business? Do I have an advertising budget whose effectiveness is measurable? What are the trends in my Days Receivable and Days inventory?

32. Checklist SummarySession 2  What is my Break Even Point?  What are the SIC and NAICS codes for my industry?  Compare key RMA ratios to your business (especially Days Receivable, Days Payable and Days Inventory)  Calculate Labor Cost % by month for the last 12 months and annually for last 3 to 5 years  Examine Accounts Receivable Aging to find overdue accounts. Contact these customers to work out a payment

33. Checklist SummarySession 3 Use process as a tool for employee engagement Review all expenses, giving special attention to: 5 highest expenses 5 fastest growing expenses expenses that are higher than industry averages Identify contracts that can be renegotiated and begin process, i.e., contact vendors, put out for bid Identify excess capacity in labor/space/equipment Create matrix of all debt terms and review to determine restructure feasibility Create budget and visuals for measurement Identify Breakeven Point for new expense levels

34. Checklist SummarySession 4 Identify exactly who you are going to sell to Find multiple ways to segment your customers into more specific groups Segment your customer base into existing, previous and new Get serious about customer retention Develop a customer database – keep it up Develop approaches to reduce customer fears Make ‘focus on growth’ an organizational priority – not just owner/manager

35. Checklist SummarySession 5 Refresh of Financial Ratios having direct bearing on cash flow Commercial Banking options to bridge shortfalls in cash flow Changes in SBA programs to improve access to capital Other options to assist in cash flow

36. Future Workshop Topics • After each session, participants will be provided an opportunity for feedback through surveys. Based on survey results, future workshops may be developed to delve into greater detail in specific areas (i.e. factoring, Government Procurement, etc).

37. We Want Your Feedback! • Please provide your feedback in the survey at your host site, or which will be sent to the email address that you provided. This will allow us to tailor upcoming events to best suit your needs!

38. Next Session: Feedback or More Topics Contact Jean Rogers (605) 330-4243 ext 0 jean.rogers@sba.gov

39. Resources Available • For a copy of this slideshow • www.sba.gov/sd • For additional training and education, visit the SBA Resource Library • www.sba.gov/tools/resourcelibrary/index.html • (features Podcasts, Publications and Research)