Companies Can Improve Their Bottom Line With A Spin-Off

Slimming Down

If your company suffers from growing pains or anticipates a hard stretch due to the current economic climate, you may want to consider a spin-off. Spinning off a business or unit can provide a variety of benefits, such as yielding much-needed cash, removing poorer-performing entities from your balance sheet and freeing up management to concentrate on your core business or pursue more profitable initiatives. To effectively grow your company, in fact, you may need to first scale back.

Several Forms

Spin-offs can take many forms and are accomplished in various degrees. A unit may be fully divested of its parent and become an independent entity; Or it may merely become a subsidiary of the original company, gaining owners but still being run by the same management.

Whatever the spin-off form a company adopts, a wholly owned segment of a larger company becomes a fully or partially independent business.

Staging the Transaction

Spin-offs involve several stages, the first – and one of the most critical – being the “pre-spin” period. This is when a company prepares a division to be spun off. During this period, the company will work to ensure the proposed deal meets all tax and regulatory requirements. The company also must gain its board of directors’ final approval.

From here, spin-offs generally are executed in one of two ways:

1. Pure spin-offs. This is when the parent company distributes 100% of its ownership of a subsidiary operation as a dividend to current shareholders.

2. Partial spin-offs. Here, the parent company sells an interest of less than 20% in the subsidiary. This method often appeals to companies that need to raise capital but want to maintain ownership of their subsidiary.

Which type of spin-off a company should pursue primarily depends on its long-term goals. A partial spin-off, for instance, may be a better choice for a division that’s not yet ready to stand on its own but that a parent company nevertheless believes the market has undervalued. Spinning off part of the division could enhance its value for an eventual sale or pure spin-off.

Why Do It?

Spin-offs have long been a popular and successful way for companies to improve their bottom lines and streamline strategic plans.

Companies spin off divisions for many reasons. A company may need to raise cash for capital-intensive projects. Similarly, a unit’s elimination could improve and make it a more attractive loan candidate. Some companies even enjoy tax benefits from a spin-off.

Sometimes spin-offs are accomplished for strategic reasons. A company might spin off a healthy entity with strong growth prospects to gain greater investor attention. Say, for example, that a company has a promising software division that’s undervalued because its parent company isn’t well known in the software sector. If that division is put up for sale and no longer buried in a larger company’s basement, it could receive the market attention it deserves.

 

Finally, a unit could be a poor performer that has become a drag on the parent company’s earnings. Selling troubled units can be challenging, however. To compensate for additional buyer’s risk, you may need to retain an equity stake in the division or provide financing for the seller.

Benefit of Separation

Whether your company is under capitalized and looking for cash with which to pursue new markets or make business acquisitions, or you simply believe that a current division could be more competitive as a separate company, consider a spin-off. Separations can be painful, and they require some time and expense. But the benefits can more than make up for the trouble.

 

Ensure Your Spin-Off Isn’t Taxing

One advantage of spinning off a subsidiary is the potential for major tax savings. Although, selling a subsidiaryoutright typically means that your company will pay substantial capital gains taxes, tax professionals can help you structure the transaction to minimize the burden.

 

 


Is Your Business You-Proof?

Whether you’re planning to sell your company sometime soon or sometime in the future; now is the time to ensure that your business isn’t all about you. From the latest Sellability Score* research involving 2300 companies from around the globe, here are two key factors that are linked to the probability of getting an offer for your business when it’s time to sell.

#1: You’re almost twice as likely to get an offer if your business can survive the “hit-by-a-bus” test.

If you were out of action for three months and unable to work, would your business keep running smoothly? The more your staff and customers need you, the less valuable your company will be to a potential acquirer. One good way to start making your business more independent is to begin spending less time at the office. Start by not working evenings or weekends, and don’t reply if employees call. Once they get the picture, the best ones will start making more decisions independently. The shift will also expose your weakest employees, the ones that need training or that need to find another job. As for you, it might come as a shock to find out how much your business has become such an essential part of you; but if you’re going to sell your business one day, you need to look at it as an inanimate economic engine, not as something that defines who you are.

#2: Companies with a management team (as opposed to a sole manager) are getting offers at almost twice the rate.

If you don’t have a management team, hiring a 2iC is a good first move. A second-in-command can help you balance the demands of running your company and advance your targeted exit time.

Here’s a four-step plan for hiring a 2iC, thanks to advice from Silicon-Valley-based Bob Sutton, author of Good Boss, Bad Boss.

  1. Identify someone internally. “The research is clear,” says Sutton. “Unless things are totally screwed up, internal candidates have a strong tendency to outperform external leaders.”
  2. Give your 2iC prospect(s) a special project, one that allows them to demonstrate their leadership skills to you and the rest of your team. If your candidate or one of your candidates excels, it will be clear to your team why he or she was selected.
  3. Communicate your choice. If you pick a 2iC from an internal pool, explain your choice to the rest of your team. At the same time, wrap your arms around those you passed over and make it clear how much you value their contribution.
  4. Shift from manager to coach. “The transition from manager to coach is a gradual evolution where the goal is to ask more questions, spend more time listening, and spend less time talking and directing,” says Sutton.

*The Sellability Score is a cloud-based software tool that allows a business owner to assess the “sellability” of their company. The researchers at The Sellability Score analyze the data from 2300 companies in a variety of countries to understand trends in the business market, with a special focus on the liquidity of privately held businesses.

If you’re curious to benchmark your company on growth potential and the other seven factors that drive your company’s value, take 13 minutes and get your Sellability Score here:

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Do you have a billion dollar business hiding inside your company?

Asking customers to pay to join a special group of your best patrons can increase your revenue, encourage customers to buy new products and services from you, and provide a healthy boost to your cash flow. Just ask Jeff Bezos, the founder of Amazon.com and the chief architect behind Amazon Prime. In exchange for $79 a year, Amazon Prime customers get:

  • Free two-day shipping on millions of items
  • Unlimited streaming videos and TV shows
  • 350,000 books to borrow for free.

It’s a compelling offer, which is why, according to TIME Magazine, more than 10 million people have signed up. If you do the math, that makes Prime close to a billion-dollar business for Amazon. And like most programs, members pay upfront, giving Amazon a big injection of positive cash flow.

But what is even more interesting is what being a member of Prime does to the buying behavior of the average Amazon customer. Prime customers pay their $79 upfront and therefore are eager to ‘get their money back’ by purchasing a bigger and broader array of products from Amazon. With free shipping and a $79 nut to recover, Prime customers go well beyond buying books from Amazon and now get everything from tires to turtlenecks from the e-tailer. According to TIME, the average Prime customer now spends $1,224 per year with Amazon vs. the average non-Prime customer who spends just $505. In other words, Prime customers spend almost three times more per year than non-members.

Most businesses have some sort of loyalty program (buy nine sandwiches and the tenth is on us or get five hairs cuts and the sixth is free). The difference with Amazon Prime is they are charging customers to sign up for their special club and the fact that customers pay to join changes their buying behavior to want to recover their membership fee.

Amazon did not invent the pay-to-join-our-club business model. Private members clubs have been doing it for years. To join an elite golf club, you pay an initiation fee of tens of thousands of dollars, which then acts as a barrier to ever leaving. But as with Amazon Prime customers, becoming a member also changes a member’s buying behavior regarding other items. When compared to someone shooting 18 holes at a public course, the average golf club member is much more likely to buy balls from the shop, lessons from the pro, and dinner from the dining room.

The “AMC Stubs” loyalty program charges moviegoers to join the club. In return, customers get free upgrades on the size of popcorn and drink orders, along with $10 of Stubs rewards to spend on anything in the theatre in return for every $100 spent. AMC’s best customers become even better customers by going to the movies even more often and filling up with goodies while they’re there.

Look at the spending patterns of people who pay a premium to join a credit card company’s loyalty program. Customers who pay upfront for a premium card charge a much broader and deeper set of services to their card than people using a freebie card.

Getting your customers to pay to join your elite customer club requires that you design a compelling offer as Amazon Prime and AMC Stubs have done. But if you build it right, not only will the club itself turn a profit; it will also provide a quick boost to your cash flow and create a legion of sticky customers who buy more because they paid to become a member.

If you’re curious to benchmark your company on growth potential and the other seven factors that drive your company’s value, take 13 minutes and get your Sellability Score here:

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Have you fallen into The Mile Wide Trap?

If your company’s revenue has stalled after a period of rapid growth, you may have fallen into The Mile Wide Trap.

Consider the case of Kim (not her real name) who runs a public relations firm. Kim studied marketing at school and went on to work for a big advertising agency where she spent ten years learning a variety of marketing disciplines, from public relations to advertising to direct marketing and social media.

Then Kim decided to leave her job to start a public relations firm. Given her depth of experience and connections, she quickly landed tractor giant John Deere as a client and was asked to handle their regional dealer events. She hired some helpers and her start-up agency quickly began to grow. Kim did a great job with the dealer events, so John Deere asked her to handle their annual sales conference. Again she delivered with style and creativity.

Impressed by Kim’s innovative approach to the event, John Deere asked her to handle some of the creative for their next advertising campaign. Kim had started her company to do PR, not advertising, but John Deere was a great client so she agreed to help out with the ads.

Then John Deere asked her to take a look at their website. Kim’s new employees had no experience with web design, but Kim had done some website jobs back at the ad agency. Not wanting to disappoint John Deere, Kim started to personally handle projects that her employees didn’t have the ability to execute.

Kim didn’t worry about new business development for own firm because the more John Deere asked Kim to do, the busier – and more profitable – her firm became.

Then one day Kim looked at her monthly P&L statement and realized that, for the first time, their sales were flat on a month-over-month basis. The next month it happened again and then again. Kim had run out of hours in the day to sell – she had inadvertently fallen into The Mile Wide Trap.

The Mile Wide Trap

The Mile Wide Trap ensnares you when you do an excellent job serving a small number of great customers and they ask you to handle more of their work. You keep delivering, and they keep broadening the list of products and services they want you to supply.

Your company is wildly profitable serving the expanding needs of this small list of “great customers” so you keep falling deeper and deeper into the trap.

Pretty soon, you’re an inch deep and a mile wide in offerings and the only person in your company with the depth of industry experience to deliver all of the services is you. But you’re trapped because your expenses have crept up as your revenue has exploded – leaving you dependent on the sales you get from a small group of demanding customers.

With no more hours in the day, your company stalls and you run on a hamster wheel just trying to keep what you’ve got.

The Solution: Sell less stuff to more people.

Instead of selling more things to a few customers, concentrate on selling a few things to a lot of customers.

Nashville-based Ethos3 is a successful design firm that has avoided The Mile Wide Trap. Most design firms are founded by a designer who gets himself in trouble by offering a broad range of design services (brochures, websites, signage, advertising) to a handful of clients. But founder Scott Schwertly knew that in order to scale up beyond himself, he needed his employees to execute the work, and therefore he decided to focus on one very small corner of the design business: PowerPoint presentations.

Schwertly’s focus on PowerPoint has allowed him to train his employees to follow his system for designing presentations. Everything is standardized – from the proposal to project management to the final invoice – so employees can follow a system that doesn’t require Schwertly. Ethos3 has scaled up nicely and counts Microsoft, Google and Cisco among its 300+ customers.

Another example: Flikli.com is a video production studio, but instead of making videos of all kinds, they’ve decided to focus exclusively on two-minute animated “explainer” videos that explain a company’s value proposition simply and effectively. Their focus on creating one specific type of product allows them to standardize their pricing and give employees a step-by-step guide to making great explainer videos. Flikli has scaled up to 22 employees and their work has been featured in everything from Wired Magazine to The Washington Post.

You can fall into The Mile Wide Trap innocently enough: you do great work and a customer wants more of you. But it’s a trap that will eventually choke off your growth. The way out is to follow Flikli and Ethos3 and focus on selling less stuff to more people.

If you’re curious to benchmark your company on growth potential and the other seven factors that drive your company’s value, take 13 minutes and get your Sellability Score here:

score

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What Buyers Look For In A Business Opportunity

buyerlookingYou have built a great business with love and care. It has grown larger than you’d ever imagined, and generates a nice profit that has allowed you and your family to live comfortably. Now you’re ready to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.

What Buyers Look For
There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
1. Cost and terms.
What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?

2. Continuity
Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example:

  • The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain,
  • The owner has special expertise that is undocumented and difficult to learn,
  • Key personnel aren’t committed to staying, or
  • Outside competition looms.

Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.

3. Growth
Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities.
What sellers should do?

It may seem counter intuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast that their company could run just fine without them or that there are plenty of opportunities they’ve failed to exploit. Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.


Foreseeing the Future

Use VR to Help Form an Exit Plan for Your Business

The owner/chef of a lucrative and well established restaurant was diagnosed with a terminal illness and suddenly was unable to work.  The business was highly dependent on the owner. While his bereaved wife struggled to run the business and hire a replacement chef, food quality, service, profitability and the reputation of the restaurant plummeted and never recovered. When the lease came up for renewal a year later, she shut the business down and walked away with nothing.

At the age of 66, the owner of a profitable construction company seeking to retire sold the business to his son, who was also an employee. His son had minimal savings so was only able to make a small down payment, and the price was discounted significantly. He also lacked the exceptional people and leadership skills of his father. The son began clashing with a key, more senior executive, who subsequently left the company to start a competitor, taking several other employees with him. At the age of 70, the father began working full time again, seeking to salvage the business, as he was dependent on the sale proceeds for a comfortable retirement.

The two entrepreneurs above had something in common with more than 85% of small business owners – they never developed an exit plan.

Without an exit plan, a business could quickly be severely damaged by a sudden crisis, such an illness, death, divorce, partnership dispute or rapid change in market or competitive environment. Or a business may deteriorate gradually as the owner burns out and neglects the business, or transfers it to a weak leader. Either way, the result is the same – greatly diminished business value. With tens of millions of baby boomers approaching retirement age, and controlling trillions of dollars of private company wealth, the issue is becoming acute.

By contrast, private equity groups and venture capital firms, perhaps the world’s most sophisticated owners and financiers of businesses, rarely fund or purchase a business without first having a formal exit plan in place. At VR Business Sales, we can help you create an exit plan so that you will be prepared for when you’re ready to step down as a business owner.

Understanding the Basics

So what is an exit plan? It’s actually a series of continually evolving and interrelated plans that will help you address at least the following critical questions:

  • What are your preferred options and timing for exiting the business? For example, sale to outsider, sale or gift to family or employees, merger with competitor, buyout by a partner, etc.
  • What family members are involved in the business and what are their objectives?
  • What are your financial objectives and retirement plans?
  • What is the value of your business now?
    • What key actions are necessary to increase business value and position it for sale at the optimum after tax amount needed to achieve your financial objectives?
    • What actions are necessary to manage estate, trust and tax issues you will face through retirement and beyond?
  • What actions, programs and agreements are necessary to ensure continuity of the business in the event of departure, death, or incapacitation of any of the owners or key executives? Examples include training programs, system development, buy/sell agreements, key man insurance, and non-compete agreements.
  • Who will replace you or other owners upon departure? Are any current executives and/or family members capable of doing so, and if so, what additional skills, training, licensing, etc. are needed? If not, what is the strategy for recruiting and developing a replacement?
  • What changes in the business and your role are needed now to preserve your quality of life and your passion for the business?

Developing a comprehensive exit plan is a demanding task that generally takes 3-6 months to complete and as long as 2 to 4 years to implement, depending on the complexity of the business. It will address a wide variety of intricate strategic, operational, financial, tax, human resource and legal issues. While a primary focus is meeting the owner’s objectives, it should ideally reflect the desires and concerns of all important stakeholders, including a spouse, children, business partners, other shareholders and employees, and in some cases customers, suppliers and the community. Input should be gathered from key advisors, including your CPA, wealth planner, estate planner, business consultant, insurance broker, appraisers and mergers and acquisitions advisor.

An exit plan is decidedly not a fancy written report that sits on a shelf gathering dust. To have any meaning, it must be regularly updated to reflect changes in your life, family, health, goals, finances, and the business. It must be action oriented and offer prescriptions that are implemented, not ivory tower theories. An ideal plan will take a long term view and continually assess actual progress of implementation against the plan timetable and take any necessary corrective action needed to keep on track with the plan.

If an exit plan sounds like a lot of work, it is. But having one can be the difference between your business shuttering when you depart and leaving a legacy that endures for generations. Contact  VR Business Sales today to learn how to put an exit plan together for your business.


What Buyers Look For In A Business Opportunity

You have built a great business with love and care. It has grown larger than you’d ever imagined, and generates a nice profit that has allowed you and your family to live comfortably. Now you’re ready to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.

What Buyers Look For

There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:

1. Cost and terms.

What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?

2. Continuity

Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example:

•             The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain,

•             The owner has special expertise that is undocumented and difficult to learn,

•             Key personnel aren’t committed to staying, or

•             Outside competition looms.

Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.

3. Growth

Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities.

What sellers should do?

It may seem counter intuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast that their company could run just fine without them or that there are plenty of opportunities they’ve failed to exploit. Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.


Separating Yourself from the Market

Creating an Innovative Strategy for Your Business

Strategy is fundamental in creating significant value in your business, and leads to sustained growth and returns.

To create a successful strategy, you must ensure that it has the following:

• Uniqueness;

• Ability to create new markets;

• Provides elements that inspire excitement and intrigue;

• Focus on specified markets;

• Employee-driven value.

Uniqueness

Given that the market is very competitive, you don’t want to present so many options that will overwhelm prospective customers. Having a strategy that is unique and innovative will place you ahead of the pack. A good example of this is what Dell achieved in the 1990s with their built-to-order product customization and direct-to-customer sales channel. As a result, they revolutionized their industry; placing them as the dominant force through the present day.

Creating New Markets

When putting together your strategy, it’s important to focus on creating new markets so that you can gain new customers. This is imperative if you’re in an industry where the competition is large. FedEx were able to do this effectively with their overnight delivery. You want to be the leader of your market and the consumers in it to demonstrate value instead of just responding to trends.

Provide Elements that Contain Excitement and Intrigue

Through stellar functionality, design and execution; a strategy should be able to provide excitement and intrigue. When Sony created the Playstation game system, a $20 billion computer game industry erupted.

Focusing on Specified Markets

The marketplace has changed considerably from one mass market to hundreds of specific ones. Capital One recognized how the market was changing, and created a digital system to canvas thousands of possible combination instantaneously, so no two card holders have the same terms.

Employee-Driven Value

Today, a strategy needs to provide an employee-driven value system, where the business is fully invested in its people; so they can capitalize off of their talents. There is much value that is generated within the parameters of the strategy and accountability.


Why Have a Business Valuation?

A business valuation helps determine what the market price for your business is, and shows a qualified buyer the value of owning it.  At VR, we will assist you in determining the value of your business when you are considering selling.

When you consult with a VR business intermediary, we will examine a variety of different areas, starting with your business’ financial information. This will include profit/loss statements, balance sheet and tax returns for the past three years, which we will recast to reflect the true earning power of a privately-held business. We will also take into consideration your company operations, customer base, goodwill and intellectual property and how your results compare to past transactions of other businesses in your industry.

Analyzing and Recasting Financial Statements

Recasting your business’ financial statement is an important tool to present the real earnings history to prospective buyers. Since most small businesses will report net income as low as possible to minimize the taxes, it’s critical to ensure we are able to arrive at an accurate value for your business. It will also provide a qualified buyer with a common baseline in Discretionary Earnings (DE) to compare earnings from different businesses to yours as well as a way to calculate potential earnings after they purchase the business.

If you own a mid-market business, we will utilize the Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). This is a good earnings measure for large corporations where the professional management team is operating the business with no owner benefits being expensed through it.

Examining a Business’ Strengths and Weaknesses

A strong advantage to having a valuation is that it forces the owner to re-evaluate the direction that they are going; not only with the business but with themselves. If you’re putting a lot of time and energy into the valuation process, leaving no stone unturned, you will be able to see how the business is doing financially and operationally compared to other competitors in the market.

What many people don’t understand about business valuations is that they are not only for generating a fair market price, but can indicate areas of improvement. You can look at it as an annual checkup from a physician. The worst thing to happen is to have a qualified buyer approach your business, and you don’t have an accurate analysis of its worth.

Each VR office worldwide assists businesses in performing extensive and thorough valuations, which will not only situate them better in the long-term but achieve the maximum fair market price.


Is a Franchise Right for You?

Before you go ahead and invest in a franchise, you want to sit down and be honest with yourself. You need to think about how much money you have to invest. Just as importantly, you should assess your personal skills and abilities. Finally, you need to determine what your goals and expectations are in owning your own franchise. Our top VR Franchise Specialist has formulated the following questions to help you find those answers.

In particular, you want answers for the following:

Finances

  • How much money do you have to invest?
  • How much money can you afford to lose?
  • Are you purchasing the franchise alone or with partners?
  • Do you need financing? Where will you obtain it?
  • What’s your credit rating?
  • Do you have any savings or additional income to live on while you start your business?

Abilities and Skills

  • Does the franchise require technical experience or special training – ie. Auto repair, home and office decorating, tax preparation?
  • What are your special and specific skills that you possess?
  • What experience do you have as a business owner or manager?

Franchise Goals

    • What is your personal minimum income requirement?
    • What types of businesses are you interested in pursuing?
    • How many hours do you want to work?
    • Do you intend to operate the business yourself or hire a manager?
    • Will franchise ownership be your primary source of income or a supplement to your current income?
    • How many years can you commit to a business?
    • Would you like to own several outlets?

VR Business Brokers of McKinney represents a wide range of franchise opportunities from a variety of industries.  To see a list of all the franchise opportunities we represent, visit our Franchise Showcase  (https://www.vrbusinessbrokers.com/franchiseShowcase/?OfficeID=4206).

If you would like to receive an invitation to our next “Buying  a Franchise Seminar” simply email info@vrmckinney.com with “Seminar” in the subject line and we’ll make sure to invite you.