As a Part Time CFO I often get involved in exit planning and executing exit plans. The purpose of this post is to give you a preliminary check list when selling your company to employees. Generally it is normally not advisable to sell your business to employees. The reasons are that employees usually do not have the financial resources to make a significant down payment nor do they have the credit capacity to assume personal guarantees that may be outstanding. However some business owners who have significant trust in employees they have employed for years or want to reward employees that have been loyal for years really do want to sell the business to these employees and are willing to assume the additional risks.
Below is a preliminary check list to consider when selling your company to employees:
• Does the potential employee buyer or buyers have as much skill
as you do? Do they think like business owners or do they think
like employees?
• When you retire, what skill sets that you brought to the table
in the day to day running of the business need to be filled?
• Will the new employee Owner(s) have those skills sets?
• If not, what is the best way of finding someone who has the
required skills and should they be hired before the sale or your
retirement date to break them in?
• When should the closing date be of the new employee owner(s)?
Timing is important. For example are you selling the business
going into peak season or going into the slow season? If you
are selling into the slow season this may bet the new employee
owner(s) off on the wrong foot.
• Does the stock ownership to employees become gradual or all at
once on a retirement date and what are the income tax
ramifications of each?
• How does personal liability get transferred?
• If multiple employee owners will they work well together and
make good partners? If not, that could spell disaster.
• How much is your business worth today?
• How much will the business likely be worth at your planned
retirement date?
• How much money do you need from the business in total?
• What form can this payment take? For example, lump sum or per
year for how many years. If you need to take a note for any
part of the purchase price which is a likelihood what is the
credit worthiness of these new owner employee(s)?
• How much money do you need to live on after retirement?
• What portion of that retirement amount must come from the
proceeds of the sale of your business?
As previously mentioned this is a preliminary list to think about and consider. As a CFO I usually hand this list to the business owner when they are contemplating selling to an employee as this list gets them thinking in the right direction. There are many other factors that need to be carefully considered about your specific situation. Make sure you have a team of professionals helping you.
Sunday, November 7, 2010
Monday, October 25, 2010
CFO Services – Explanation of Accrual Versus Cash Reporting
As part time CFO I constantly get asked the question as to what the difference is between the cash and accrual basis of accounting. For those of you who are QuickBooks users you probably know that QuickBooks (thru the "Modify Report" Button) provides the user with the option of reporting financial statements under either cash or accrual reporting basis. Many times my clients see a significant discrepancy in their profit and wonder why. One of my CFO Services is to explain to the client the difference between the cash and accrual reporting basis.
Under the Accrual Reporting Basis revenues are recognized in the month the product is sold or the service is performed whether the cash on the sale is received or not. To give you an example, if you sell computers and the computer is shipped to the customer in the month of May with 60 day terms. Under the accrual basis the sale will be recognized in May and not 60 days later in July when the cash is received. Under the Accrual Reporting Basis expenses are recognized when incurred and are not recognized when paid. For example, if part of your cost to produce the computers you built and shipped in May were to hire outside contracted labor with 30 day terms the expense would be recorded in May even though you paid for the contracted labor in June.
Under the Cash Reporting Basis revenues are recognized in the month the product is paid for by the customer and not in the month when the product was shipped to the customer. Going back to the computer example the computer is shipped to the customer in the month of May with 60 day terms. Under the cash basis the sale will be recognized in July when the product is paid for, not in May when the product was shipped. Under the Cash Reporting Basis expenses are recognized when paid and are not recognized when incurred. For example, if part of your cost to produce the computers you built and shipped in May were to hire outside contracted labor with 30 day terms the expense would be recorded when you paid the expense in June and not when you incurred the expense in May.
So which is method is better? For income tax purposes both methods of accounting are allowed and you should consult an income tax professional to find out. For management purposes, in my view the accrual basis of accounting is better hands down. The accrual basis is better because it provides a more accurate matching of expenses with revenues. Taking a look at the computer company example under the Accrual method the product is shipped in May and revenue is recognized. The expense associated with the product (outside contractors) is recognized in May when incurred. This is a perfect match of revenues with the expenses that produced that revenue. Now take a look at the same example under the cash basis. The revenue would be recognized when paid in July and the expense would be recognized when paid in June. There you have an obvious mismatching of revenues and expenses.
Through utilization of the accrual basis and the proper matching of revenues with expenses more useable management reports are available and in turn better decision making. Certainly the CFO as well as the business owner will be able to better utilize and make more effective judgments with the accrual basis of accounting. As previously mentioned the IRS allows for both methods of accounting however under GAAP (Generally Accepted Accounting Principles) only the accrual reporting basis of accounting is allowed.
Under the Accrual Reporting Basis revenues are recognized in the month the product is sold or the service is performed whether the cash on the sale is received or not. To give you an example, if you sell computers and the computer is shipped to the customer in the month of May with 60 day terms. Under the accrual basis the sale will be recognized in May and not 60 days later in July when the cash is received. Under the Accrual Reporting Basis expenses are recognized when incurred and are not recognized when paid. For example, if part of your cost to produce the computers you built and shipped in May were to hire outside contracted labor with 30 day terms the expense would be recorded in May even though you paid for the contracted labor in June.
Under the Cash Reporting Basis revenues are recognized in the month the product is paid for by the customer and not in the month when the product was shipped to the customer. Going back to the computer example the computer is shipped to the customer in the month of May with 60 day terms. Under the cash basis the sale will be recognized in July when the product is paid for, not in May when the product was shipped. Under the Cash Reporting Basis expenses are recognized when paid and are not recognized when incurred. For example, if part of your cost to produce the computers you built and shipped in May were to hire outside contracted labor with 30 day terms the expense would be recorded when you paid the expense in June and not when you incurred the expense in May.
So which is method is better? For income tax purposes both methods of accounting are allowed and you should consult an income tax professional to find out. For management purposes, in my view the accrual basis of accounting is better hands down. The accrual basis is better because it provides a more accurate matching of expenses with revenues. Taking a look at the computer company example under the Accrual method the product is shipped in May and revenue is recognized. The expense associated with the product (outside contractors) is recognized in May when incurred. This is a perfect match of revenues with the expenses that produced that revenue. Now take a look at the same example under the cash basis. The revenue would be recognized when paid in July and the expense would be recognized when paid in June. There you have an obvious mismatching of revenues and expenses.
Through utilization of the accrual basis and the proper matching of revenues with expenses more useable management reports are available and in turn better decision making. Certainly the CFO as well as the business owner will be able to better utilize and make more effective judgments with the accrual basis of accounting. As previously mentioned the IRS allows for both methods of accounting however under GAAP (Generally Accepted Accounting Principles) only the accrual reporting basis of accounting is allowed.
Sunday, October 24, 2010
CFO News Week Ending October 15, 2010 - Author: admin Posted: Sun Oct 24, 2010... http://ow.ly/19Cece
Saturday, October 9, 2010
What is Educational Marketing?
As a Part time CFO I need to be able to play a large role in helping the business owner make strategic business decisions. In order to do this the CFO has to know more than just the numbers. The CFO needs to understand the whole business. This includes having a solid understanding of marketing.
Today I want to discuss a marketing concept that in my view is very effective. It is called educational marketing. Educational marketing is defined as informing your customers on how to make the best buying decisions. In other words stop selling and pitching and start helping and informing your customers on how to buy. Educational marketing converts skeptical shoppers who became skeptical because they were sales pitched to death and turn them into informed buyers. Educational marketing is a specific type of marketing where you assume an expert and training role and you engage potential customers and clients through information. Educational Marketing is more effective than traditional price driven advertising as it helps consumers do their homework so the prospect can make an informed buying decision.
The hard sell is getting very stale. Have you noticed that people are avoiding and running away from being sold and pitched? They look for information that helps them buy the right products. By informing your customer you are inherently building a relationship and trust which is the basis for who people do business with. In addition to the credibility you build, you become an expert and a resource instead of just another supplier or vendor.
Think about it. Is your primary objective in marketing your business to promote what you do? Is it to promote your product or services? I say NO and NO! I say the most important function that your marketing serves is to establish that you and your company are knowledgeable, capable and can be trusted. To do this is going to require a radical shift in traditional thinking!
By answering the questions that customers are asking themselves when they are making decisions to buy your product or service is the exact approach you should take in determining your educational marketing message. Put yourself in the customer’s position and ask the questions. It is the educational and instructional answers to those questions that will produce your marketing message.
Here is the point. If you are the one who is informing the prospect and providing solid information to the prospect. Guess who the prospect will develop a relationship and trust with and guess who the prospect will think of, when it comes time and when the prospect is ready to make the ultimate buying decision? That’s right, you, because you are the person who provided the information and education and you are the expert and the prospects resource! It’s providing your prospect with educational based messages not selling based messages that will turn the prospect into a customer.
Resist the urge to pitch and start educating your prospect. You will gain the credibility and trust that will earn you much more business!
Today I want to discuss a marketing concept that in my view is very effective. It is called educational marketing. Educational marketing is defined as informing your customers on how to make the best buying decisions. In other words stop selling and pitching and start helping and informing your customers on how to buy. Educational marketing converts skeptical shoppers who became skeptical because they were sales pitched to death and turn them into informed buyers. Educational marketing is a specific type of marketing where you assume an expert and training role and you engage potential customers and clients through information. Educational Marketing is more effective than traditional price driven advertising as it helps consumers do their homework so the prospect can make an informed buying decision.
The hard sell is getting very stale. Have you noticed that people are avoiding and running away from being sold and pitched? They look for information that helps them buy the right products. By informing your customer you are inherently building a relationship and trust which is the basis for who people do business with. In addition to the credibility you build, you become an expert and a resource instead of just another supplier or vendor.
Think about it. Is your primary objective in marketing your business to promote what you do? Is it to promote your product or services? I say NO and NO! I say the most important function that your marketing serves is to establish that you and your company are knowledgeable, capable and can be trusted. To do this is going to require a radical shift in traditional thinking!
By answering the questions that customers are asking themselves when they are making decisions to buy your product or service is the exact approach you should take in determining your educational marketing message. Put yourself in the customer’s position and ask the questions. It is the educational and instructional answers to those questions that will produce your marketing message.
Here is the point. If you are the one who is informing the prospect and providing solid information to the prospect. Guess who the prospect will develop a relationship and trust with and guess who the prospect will think of, when it comes time and when the prospect is ready to make the ultimate buying decision? That’s right, you, because you are the person who provided the information and education and you are the expert and the prospects resource! It’s providing your prospect with educational based messages not selling based messages that will turn the prospect into a customer.
Resist the urge to pitch and start educating your prospect. You will gain the credibility and trust that will earn you much more business!
Thursday, October 7, 2010
Employee Theft or Embezzlement - Author: admin Posted: Sun Oct 03, 2010 9:37 p... http://ow.ly/19lgJR
Sunday, October 3, 2010
Do you keep growing your backlog?
As a Part Time CFO I look very carefully at sales order Backlogs. I understand that given the current state of the economy, having long backlogs have not been the problem, but I still think that it is a discussion point. First let me make sure I say that healthy backlogs are different times frames for different industries. Some industries are not considered healthy if their participants do not have a 6 to 12 month backlog. Some industries customers expect backlog. In this article I am asking the business owner to assess their backlog from the perspective of what is healthy in their industry.
Backlogs can be an indicator of the customer's propensity to buy. Backlogs can be an indicator of demand. Backlogs can be a solution to cash flow problems by increasing production, staff or capacity to cut into the backlog and accelerate the receipt of cash from the customer. Backlogs have their place. They keep the business owner in a state of harmony. They keep employees busy and minimize layoffs. However, there has to be limits. There has to be a point where the backlog is too long. The longer the backlog the longer customers are waiting for product and services. The longer the backlog usually means the longer the cash cycle because inventory and labor is needed well in advance of delivery of the products and services. So although backlogs can solve cash flow problems by cutting in to the backlogs, they can also cause cash flow problems if they get too long. The bigger the backlog the longer the cash cycle the more strain on cash flow. Also, by accelerating sales and cutting into the backlog you will increase production thereby decreasing fixed overhead, have faster inventory and sales turnover and make more money.
The business owner together with the CFO has to make it a point to assess the backlog. Some of the things that need to be assessed are:
If their currently a cash flow problem?
What was cash flow and profits like with a shorter backlog and faster turnover?
What is the staffing availability?
What is the customer’s patience level?
The CFO should prepare a business and cash flow forecast to help answer these questions and more with respect to the size of backlogs.
Just like there are optimum inventory levels and optimum employee levels there are optimum Backlog periods. Don’t get me wrong, backlogs can be great, but an optimum backlog must be determined. The optimum backlog period depends on the industry.
Backlogs can be an indicator of the customer's propensity to buy. Backlogs can be an indicator of demand. Backlogs can be a solution to cash flow problems by increasing production, staff or capacity to cut into the backlog and accelerate the receipt of cash from the customer. Backlogs have their place. They keep the business owner in a state of harmony. They keep employees busy and minimize layoffs. However, there has to be limits. There has to be a point where the backlog is too long. The longer the backlog the longer customers are waiting for product and services. The longer the backlog usually means the longer the cash cycle because inventory and labor is needed well in advance of delivery of the products and services. So although backlogs can solve cash flow problems by cutting in to the backlogs, they can also cause cash flow problems if they get too long. The bigger the backlog the longer the cash cycle the more strain on cash flow. Also, by accelerating sales and cutting into the backlog you will increase production thereby decreasing fixed overhead, have faster inventory and sales turnover and make more money.
The business owner together with the CFO has to make it a point to assess the backlog. Some of the things that need to be assessed are:
If their currently a cash flow problem?
What was cash flow and profits like with a shorter backlog and faster turnover?
What is the staffing availability?
What is the customer’s patience level?
The CFO should prepare a business and cash flow forecast to help answer these questions and more with respect to the size of backlogs.
Just like there are optimum inventory levels and optimum employee levels there are optimum Backlog periods. Don’t get me wrong, backlogs can be great, but an optimum backlog must be determined. The optimum backlog period depends on the industry.
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