BUSINESS Exit Strategy Basics high income could use his/her share of the loss from one or more limited part- nerships to reduce or entirely offset their personal income tax liability. Indeed, it was not uncommon for some wealthy investors to actually receive a check from the IRS, whereas they would have otherwise had a personal income tax liability of several hundred thousand dollars for that tax year. This may be too much information, but the point is that investors have been using accelerated de- preciation of real estate as a legal income tax shelter mechanism for decades. Al- though some of the laws and tax regula- tions have changed over time, if you own a building, you can use the same funda- mental method. How to Enhance the Perceived Value of Your Business Reflecting on the more than a dozen ar- ticles in the “Tools for Managing Your Business” series, there have been numer- ous suggestions and techniques about how to make your business successful. Although the term “successful” is oſten narrowly interpreted to mean profitable, that’s a one-dimensional description. A business should be profitable and have positive cash flow, but a solid infrastruc- ture can offer the owner more time for quality-of-life endeavors and make the business appealing to a prospective buyer. Sure, sometimes businesses have been purchased despite their poor financial performance — or even because of it. Very profitable companies with strong cash positions sometimes purchase un- successful firms primarily for their NOLs (net operating losses). The underperform- ing company’s NOL can be carried for- ward to reduce or offset the acquiring company’s current and future taxable income liability. Although this subject is far beyond the scope of our article, 20 KEYNOTES NOVEMBER 2020 “One common exit strategy is to use the profits from your business to fund your personal retirement investments.” this concept is germane to exit strategies and understanding a particular type of buyer’s motivation. Competitive, strategic and tax consid- erations can and do form compelling ra- tionales for acquisition and sometimes merger. But, generally speaking, it can be risky to overly depend on such fortu- itous opportunities as your exclusive exit strategy. Remember, you also want to get the best possible price, terms and timing, if/when you sell your business. Ideally, position your business so it appeals to a broad range of potential buyers. Think about a particular business that might be an attractive acquisition for your own business. Assuming that you had an opportunity to buy it, what would make it more appealing (oth- er than price)? Ideally, it would have a steady cadre of established and success- ful clients/accounts that are growing and punctually pay their bills, with none rep- resenting more than 10 to 15 percent of your total sales volume. But as a prospective buyer (even more so, as a passive investor), you’d also prefer an established entity with solid organiza- tional structure, experienced and profes- sional staff, appropriate tools and equip- ment and in-place procedures, processes and best practices. In other words, a busi- ness that is reasonably autonomous and did not require extensive reconfiguration, investment, handholding and microman- agement. With all this in mind, let’s do some reverse engineering. Make your own list of desirable acqui- sition attributes and then see whether your existing business would pass such a sniff test. Now do it again, but this time, remove yourself from the equation. With- out you, does your business resemble the scene from The Wizard of Oz when the curtain was pulled back to reveal the true identity of the wizard? Can your business withstand the kind of scrutiny anticipat- ed from a potential buyer’s due diligence? If we cut through the BS, one good in- dicator is if you’re able to take an occa- sional day off without manning the cri- sis hotline every minute. Be honest: Can you really take one or a few days off and have the business run without you? No, it does not have to run as well without you. But does your absence cause a disaster? If so, what does this suggest about the value of your business if/when you aren’t present? No, cloning is not yet a solution, and in your case, society at large might object to a second you! Do your employ- ees welcome and even pray for you to take a day off? What’s My Business Worth? There are many books about how to es- timate your business’s value. But, ul- timately, any business or asset is only worth what a buyer is prepared to pay for it when not under duress to conduct the transaction. This article does not attempt to suggest formulas or other methods of determining the value of your business. But let’s take a look at real-world factors that influence the relative value. Yes, you can consider the hard assets that the business owns (inventory, tools, equipment, vehicles, buildings, etc.), and WWW.ALOA.ORG
