An Exit Interview with Jim Ramstad

Jim Ramstad is no stranger when it comes to business. From starting businesses to selling businesses and every step in between, Jim has done it all. After all his time and experience, Jim has decided it’s time for a new path in life – retirement!

Jim has been an important part of our work here at Eide Bailly, and we know his advice and knowledge will be missed. We sat down with Jim to ask him to share some of his thoughts and advice with you, fellow business owners and entrepreneurs.

How long have you worked in the business world?

Altogether, I’ve spent 49 years in the business world, involved in various aspects of business.

How/what made you want to get involved in business?

Growing up and in high school, I never even thought of getting involved in business. In fact, I wanted to be a teacher and a coach. As I grew up, I watched as my dad’s family did very well for themselves in business. As I watched their successes and trials, I became more and more intrigued, and decided it was the right path for me.

If you weren’t in business, what would you be doing?

As mentioned before, I thought about being a teacher and a coach when I was younger. Now looking at it, I think it would be fun to be in politics. Twenty some years ago, I took a personality test that determined the top two areas that would make sense for me career wise. My top two were politician and ambassador, and accountant wasn’t even on the list. I feel like ambassador made sense, and I’ve gotten to do some of that in being an ambassador for other businesses.

How long have you been at Eide Bailly?

I’ve been working at Eide Bailly for 12 years, and I was a client here before I started working here. I’ve always had a connection with the Firm, which has led me to some of the career positions I’ve been in.

What positions have you held prior to being at Eide Bailly and at Eide Bailly?

Prior to being at Eide Bailly, I held many different positions. I’ve been an accountant, controller, CFO, COO and CEO. I’ve also done business development and government relations for a company in which I got to propose a piece of legislation that actually got approved into law in the energy bill.

Here at Eide Bailly, I’ve always worked in business advisory. In 2005, I started working with entrepreneurs to help get their businesses to take off. Throughout this role, I’ve been blessed and fortunate to take my personal experiences in business and apply it to other clients and help them learn from it.

What was your favorite position and why?

I don’t think I could really pick a favorite – I’ve enjoyed them all! I’ve really enjoyed the last twelve years here at Eide Bailly. I’ve enjoyed getting to apply my past experiences while also learning new things from our clients. Although there have been challenges, I’ve found it very rewarding.

What changes did you see take place in the business/accounting world during your tenure?

The biggest and most obvious change I’ve seen is in technology. From everything being completely manual to now being nearly all online and in the cloud, it’s been a total change. When I was 26, I worked with for a trucking company that completed everything manually. I gradually helped introduce them to technology, which was a process. Now, they use technology for everything.

What advice would you offer small to mid – sized businesses just getting started?

Get an advisor. It’s important to find people who are truly and genuinely interested in you and your success, not just in selling you something or getting a fee for the job. Find these people and rely on them – don’t try to do it all on your own.

What will you miss most about Eide Bailly?

The people, hands down. I am also sad that I won’t be around to watch the Possibilities Center grow into a bigger, Firm-wide practice, but I will be paying attention and willing to help if the need arises.

What are your plans after retiring?

I’m going to stay busy. I’m going to use my facilitation skills to start some groups in the FM area, such as mastermind groups and a bible study type group. I always want to continue to be a mentor and resource for Eide Bailly professionals who may need my help. The rest of my time will be spent with family, being a grandpa and a great grandpa.

While Jim isn’t leaving us for a few more weeks, please join us in wishing him well and thanking him for all his hard work and dedication.

Who Doesn’t Love a Discount?

Who Doesn’t Love A Discount?

If given the option to pay full price or receive a discount, it’s safe to say the majority of individuals would prefer a discount, regardless of what they’re purchasing. Why would this be any different when it comes to your business?

When valuing a minority interest in a business (an ownership interest of 50% or less), it’s typical of buyers in the marketplace or a valuation analyst to apply minority discounts, which are more technically known as a discount for lack of control (DLOC) and a discount for lack of marketability (DLOM).

We know what you’re thinking: what are these discounts and why do they matter? Here’s a look at each type:

A DLOC is an amount or percentage deducted from the operating value of an entity to reflect the absence of some or all of the powers of control. When someone holds a minority interest in a business, they lack the ability to:

  • Implement business and operational characteristics;
  • Appoint and remove management;
  • Control the timing and amount of distributions;
  • Put the entity’s assets to their highest and best use.

In other words, the person buying into the business is receiving a discount because they are not receiving the full benefits of control.

A DLOM is an amount or percentage deducted from the operating value of an entity to reflect illiquidity (inability to quickly convert to cash) in privately-held entities when compared to public companies. In the valuation world, we refer to liquidity as “cash in three days”, which is expected when selling publicly-traded stock. However, when it comes to selling private companies, it takes much longer than three days to receive cash, which is why a DLOM is appropriate.

Discounts are extremely important to understand when negotiating transactions with investors. Investors’ primary way to receive a return on their investment is through distributions, which are primarily dependent upon the company’s financial stability, and diversification among the services and/or products and geography of the business.

Going back to the concept of “cash in three days”, investors will also look at the obstacles they could encounter if they decide to sell their interest in the future, which could potentially be affected by the company’s transfer restrictions and redemption policy. Therefore, appropriately discounting a minority interest is important as it could potentially make or break a deal.

Of course there are some risks that should be considered on the sell-side of a transaction. The amount of time it takes to complete a transaction, accounting and administrative fees incurred and the probability that the actual sales price could be much less than the asking price are some sneaky issues worth keeping an eye on.

Not only are discounts important to consider when searching for outside investors, but they are also a strategic tool that can be helpful when exiting a business. In fact, if you’re planning to sell your business, there’s a good chance you might encounter these discounts. It’s important to understand them so you know what price you can realistically expect from the sale of your business.

It goes without saying that buyers appreciate discounts to the share price, but sellers may not. After all, everyone wants to get top dollar for their business. Buy-sell agreements are commonly used to allow a company or its shareholders to purchase the interest of a shareholder who decides to withdraw from the company for a specific price or by using a set formula to determine a price. However, instead of preparing for a smooth exit, many buy-sell agreements tend to cause more issues as the use of a set price or a formula may not consider the current economic and financial condition of the company, which could lead to legal (and expensive) issues.

An effective buy-sell agreement should include an explanation of relevant discounts and the requirement for an appraisal from a certified appraiser to determine the current fair market value of the company. A well written buy-sell agreement will help minimize misunderstandings and disagreements, ensure proper discounts are appropriately applied to the company value and make for a smoother transaction among all parties involved.

Buy-sell agreements and all pieces of the puzzle can be difficult to put together. Luckily, our business valuation team is trained and ready to help you conduct a successful business transaction. If you need help, just ask!

 

Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.

Exit Planning: Continuity

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

Throughout the course of this blog series, we’ve covered some important exit planning steps, such as business valuation and setting exit objectives. However, situations arise that we aren’t able to plan for.

So how do you prepare your exit plan? One word … continuity.

Business continuity planning, in its most basic sense, prepares the business owner and all related parties for unforeseen circumstances impacting the business. Events such as death of an owner or a disability are often covered in continuity planning. Continuity planning communicates the owner’s wishes regarding the continuity of the business in writing. You should also ensure it includes both short term and long term plans.

Here are a few questions to consider when starting to think about continuity planning:

  • Do you have a plan for your business if the unexpected were to happen to you?
  • Who can operate and control your business and financials if you’re gone?
  • Do your employees, specifically senior management employees, know of your plans?

While you might think it’s slightly morbid to think about, remember how important this is. Take a moment to think through these questions and then begin to draft your continuity plan based on the answers.

Here are BEI’s top five recommendations for content in a continuity plan:

  1. Extra Pay for the Extra Mile| The stay bonus plan emphasizes how critical it is for certain employees to remain with the business after your departure. Start with figuring out which employees these are and how much they’ll make for sticking around. From there, a bonus amount can be determined. The stay bonus gives these awesome employees an incentive to stick around with the business rather than jumping ship…but with a great business like yours, they’ll probably want to stay no matter what.
  2. Handing Off the Baton|This recommendation covers the terms of ownership transfer when the time comes. It allows remaining employees and/or co-owners to make the right move when transferring ownership. In other words, it makes sure all your hard work is being handled correctly. It may also include exceptions to the terms, such as transfers to family or other employees of the company in the event of an unexpected death or disability.
  3. Where’d the Money Go?| This recommendation covers what steps need to be taken in the event financial resources are no longer available to support the business. In this part of the plan, it is common to summarize the financial support of the company, such as leases, loans and lines of credits. The financials of your business can also include possible solutions in the event commonly used financial resources are no longer available.
  4. Back to the Basics| The continuity instructions cover the basic aspects of the plan on a written or electronic instruction form the owner can complete, sign and store with all other important personal planning documents. It is important to frequently review this to ensure everything is updated to match any recent changes. The instructions should include the desired future of the company which covers sale and transfer of the business. Not sure on who you want your business to go to? Check out these blogs for guidance on making this choice. In addition to who the business will be sold to, the instructions may also contain the desired price for the business, including a general price range and an absolute minimum sale price. Important information is often found in the instructions, such as important dates and deadlines and other information not easily obtained. Think of this as a game plan with all the directions clearly explained.
  5. Salary Summary| The last recommendation summarizes the plans to pay salary or compensation to the owner and the value that can be expected on departure for the business. This can include events that would trigger such payments, payment amounts and termination of payments.

Although there may be other important information to consider depending on your own unique business, these five recommendations are a good starting point for business continuity planning.

Just like all other aspects of life, change is constant and it impacts us and our business whether we are ready or not. Continuity planning helps you be prepared for these changes so your business can continue to be successful after your departure.

 

Exit Planning: Increasing Value

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

Today we continue our journey through the exit planning process. Our last blog discussed the importance and method of finding out the value of your business, and today we will build off that concept with step three: increasing the value of your business.

After completing your business valuation, you may have found your business is not worth as much as you hoped. Because of this, selling your business will not generate enough money for you to live comfortably the way you were hoping. Another problem you could be facing is a lack of interested buyers, which could be due to the fact your business doesn’t pose much value to them.

So, how do you solve these problems? The answer lies within value drivers, which do exactly what the name suggests – they drive up value!

It would be a mistake to assume every business, no matter the type, could increase its value by utilizing every value driver possible. After all, each business has characteristics that make it unique. However, there are seven value drivers, according to the BEI, that are common to all industries and can be tailored to match each unique business.

Management Team – One of the most important aspects of any business is its employees. When you think of a management team, you should be thinking of those employees responsible for decision making, monitoring and setting objectives and motivating employees.

So how can this team be a value driver? It’s likely the team members have a variety of talents and skills that have helped the business become what it is today, and have a proven track record of success. Potential buyers are looking for a management team with staying power; in other words, they want these talented individuals to stick with the company to help ensure success. It is also common to assume if a management team can stay in place, the company then has the ability to keep and maintain customer relationships, which keeps the company’s reputation intact. The stronger the management team, the higher the offer from the buyer is likely to be.

Operating Systems – In addition to a great management team, buyers are also interested in what systems and policies are in place to continuously generate revenue from an already established, yet still growing customer base. These systems include, but are not limited to, procedures used to generate revenue and maintain expenses, customer relationship management programs (CRM) and means of distribution. Having these systems properly established and documented show the buyer the business can continue to be profitable after sale. Think from the buyer’s perspective; as a buyer, you want to be sure the business will grow and continue forward with new ownership and that it will not fall apart when the previous owner exits.

Customer Base – We’ve touched on the customer base in the previous points, but this value driver deserves its own emphasis. Buyers are looking for a business that has an established customer base that won’t be going anywhere soon. According to the BEI, it is a great practice to have a diverse customer base in which no single client accounts for more than 10% of total sales. This adds protection if a customer(s) is lost. When buyers are willing to shell out large amounts of money, they want to make sure they are getting what they’re paying for.

Facility Appearance – Although not a huge factor for most businesses, it is still important to keep in mind some buyers are very, shall we say, picky? Some buyers have a tendency to be more reserved with their spending if the physical appearance of the business or its equipment isn’t very appealing to the eye. A clean and organized office promotes the idea that the business is also well organized. Superficial improvements, both interior and exterior, can improve the marketability of your business.

Growth Strategy – It is important to have a realistic growth strategy in place. By realistic, we mean a growth strategy that fits your business, not an elaborate plan that is not attainable. Keep your growth strategy ambitious, but also attainable. This strategy can show potential buyers specific reasons why cash flow and the business will continue to grow after it has been purchased. The growth strategy should be based on factors such as market plans, industry dynamics and demand based on demographics, to name a few. The growth strategy helps the buyer understand your business, and where it will go in the future.

Financial Controls – Financial goals are not only an important part of how a business is managed; they also help to safeguard a company’s assets and support any claims of the company’s profitability. A buyer will not spend a large amount of money on a company without first knowing what the company’s cash flow has looked like; they need to have confidence in the company. Giving buyers confidence can lead to a much higher valued sale.

Cash Flow – To piggy back off the last driver, not only do we want financial controls in place, but we want to make sure the cash flow is All of the value drivers in some shape or form contribute to a stable and predictable cash flow, so it is important to focus on all of the value drivers to operate their business more efficiently. Buyers look for companies with a solid cash flow they can increase after purchasing, and are willing to pay top dollar for these companies.

What a buyer decides to pay for your business is dependent on many factors. However, to increase that number and get top dollar for your company, it will be beneficial to follow these seven value drivers down the road of exit planning success. Following these seven value drivers can lead to a competitive advantage over other businesses that will give your business the upper hand when it comes time for buyers to decide which business they would like to purchase.

 

Exit Planning: Business Valuation

As a reminder, these seven steps are based off of BEI’s Seven Step Exit Planning Process

Welcome back to our series on exit planning. In our last blog, we talked about the goals and objectives needed to create a successful exit plan. One of those goals was knowing how much money would be needed from the sale of the business to maintain your current lifestyle. That brings us to the topic of this blog: business valuation.

We get it, you’re probably wondering why you need to do this now or how this applies to you. Even if you are not planning to leave the business for quite some time, or think you know what your business is worth, business valuation is an important and crucial step to ensure you have a solid exit plan in place.

Okay, let’s get down to the nitty gritty. For most business owners, their business is their most valuable asset. Sure, you might have real estate, property or stocks, but the main source of income is the business. When you sell the business, you need to know if the cash flow from the sale will be enough to sustain your lifestyle desires. So, how does this business valuation thing work?

First, it is important to note there are two types of valuations that can be done, based on how far away you are from your exit date.

  1. Thorough Valuation – If you are ready to leave the business now, it is important to have this type of valuation completed. This will establish whether your company can be sold today at its appraised value. Often times, business owners think their business is worth more or less than it actually is. This valuation ensures a correct estimate is in place.
  2. Calculation of Value – This type of valuation is usually completed annually for those who plan to leave the business, but not for quite some time. This gives more of an approximation of the value, rather than a definitive answer. It helps to determine if the business is on track.

By now, you should be able to determine which type of valuation best suits your needs. However, you’re probably still wondering why you should be doing this. After all, it is your business and you know more about it than anyone else.

Here are some of the top reasons why you should have a business valuation.

  • Determine Worth – When business owners are ready to sell, they want to receive the full and fair value from their ownership interest. But how do they know exactly what this price should be? Often times, following casual estimates and rules of thumb does not take into account location, reputation, technology and other important factors that impact the business’ worth. A business valuation, on the other hand, does consider everything. Think: would a buyer purchase a business without knowing how much to pay for it? Probably not, and you as a business owner also need to know how much it is worth in order to determine an asking price.
  • Accuracy – After determining what your business is worth, you then have a comparison factor. Once you know how much the business is worth, you can then compare that with your lifestyle desires after the sale, and accurately predict if the business sale will be enough to sustain the lifestyle, or if changes will need to be made to get to this level (our next blog focuses on the idea of increasing value).
  • All Factors Considered – Along with including factors such as technology, reputation, etc., the valuation takes into account many different scenarios and options to ensure everyone involved will get the best bang for their buck. This takes into consideration the idea that the value of the business is actually relative and not fixed, meaning it can vary based on many factors. A valuation will take into account the different buying scenarios, such as selling to a third party or selling to an insider. With the value fluctuating, having a valuation done periodically will help keep the value up to date so you have the best idea of just how much you will get from the sale.
  • Motivation – Finding out what your business is worth through a valuation can be a great form of motivation for all parties involved, but especially management and employees. Once insiders know where the business is standing and what potential it has for growth, they can often be motivated to work harder to reach these goals. A common way for this motivation to occur is through incentive programs, especially those that link the size of the incentives to the growth in the value of the business.
  • What is Fair – If you are selling a business, do you really believe interested buyers will just take your word for it and accept whatever price you say? Probably not. A business valuation can help determine the fair market value of your business, which can then help you develop a fair asking price that doesn’t offend anyone in the process.

So there you have it. A business valuation is absolutely necessary, no matter what stage of the business you are in. It is recommended to start early in case the value needs to be raised, but no matter when you decide to act, the business valuation should never be ignored.

 

Exit Planning: Identifying Objectives & Goals

As a reminder, these seven steps are based on BEI’s Seven Step Exit Planning Process

Last week, we introduced a new blog series on exit planning. There are many things to consider when you’re getting ready to exit. Today’s topic? Identifying owner objectives and goals.

In order to successfully begin exit planning, you need to identify goals and objectives to guide you through the stages of exit planning. These goals act as a roadmap and, let’s face it, trying to navigate without a roadmap is a difficult task that can take you in circles and get you lost.

When a man does not know which harbor he is heading for, no wind is the right wind” – Seneca

This quote, although a classic, still holds true today, especially in the world of exit planning. In the context of exiting a business, no goal means no style. There will be no smooth transition or easy transaction; the process will be bumpy and difficult. In 2015, Securian Financial Group conducted a study which found that 72% of small to midsized business owners don’t have an exit plan, and aren’t taking action toward getting one. If goals are so important in exit planning, why are so many people not setting them?

The main reason, according to Business Enterprise Institute, is because many owners find it emotionally exhausting. From the idea of separating themselves from an entity they have created, nurtured and watched succeed, to the time and energy needed to create a successful exit strategy, many owners just simply feel they cannot handle the pressure. However, by setting goals and objectives, some of this stress can be alleviated, as these goals are the guidelines for the strategy.

John Brown of the Business Enterprise Institute notes there are five central elements needed before a comprehensive exit plan can be created. These elements include:

  • setting a departure date
  • conducting a financial needs analysis,
  • choosing a successor
  • determining the preliminary valuation of the company
  • estimating the company’s future cash flows

Although all five elements are highly important, the first three embody the key universal objectives in developing a successful exit strategy.

Setting a Departure Date

The first step in creating an exit plan is setting a date for departure, as this will be the basis for your plan. You might be wondering how in the world it’s possible to simply pick a date. Many people plan around a significant life event, such as a child’s graduation or reaching retirement age. Other owners may just throw a date out there that sounds appealing. However you decide to choose your departure date, it is important to note that nothing is set in stone, and a rough estimate is better than nothing at all.

Financial Needs Analysis

Conducting the financial needs analysis will, in the most basic sense, tell you how much money you need from the sale of your business in order to live comfortably. To conduct this analysis effectively, a business owner must look at his or her current lifestyle choices, and determine how they expect this lifestyle to look in the future and how much it will cost. Then, many factors, such as inflation rate, life expectancy, after tax income rate and income variations, must be considered. Once all of these items have been factored together, the owner can come up with the bottom line amount needed from the sale of the business.

Choosing a Successor

Choosing a successor may be one of the hardest steps in exit planning. In this step, the owner is faced with a choice of who will take the reins once he or she makes their exit. There are many types of successors (some of them are mentioned here) that owners must consider, but the five that are the most common on include:

  • children/family
  • co-owners
  • key employees
  • an unrelated third party
  • an ESOP
  • Each of these choices have advantages and disadvantages (more on that down the road) that must be taken into account when making the choice. It is important to make sure you don’t let emotions get in the way; it is often best to follow your gut feeling – if it’s wrong, this can possibly be tweaked. It is better to have made your choice, and maybe even included a backup option, than have nothing at all.

This first step in exit planning helps owners clarify and prioritize objectives, facilitate progress, control the exit planning process and focus energy on the reason they got into business in the first place.

Next up: business valuation and future cash flows. Stay tuned!