Realize Your Business ROI
How Will You Equitably And Profitably Transfer Your Business?
by Chia-Li Chien | Feb. 19, 2014
What would have been your ROI (Return of Investment) if you had invested in Apple on January 6, 2003? Well, according to Yahoo Finance, if you had bought Apple stock on that date, you would have paid $7.36 a share. On January 7, 2013, the same Apple Stock was trading at $520.30 per share. A quick calculation reveals your ROI would have been 69 times greater than your initial purchase. Let’s further assume that if on average ROI is 7%, using the Rule of 72, your investment should double in 10 years. Wow, the ROI on Apple stock more than doubled in ten years. Would you have liked to have invested in Apple on January 6, 2003? If so, when would you like to sell your Apple stock to realize your ROI?
What if you started your business back on January 6, 2003 and used your own hard earned money to the tune of $100,000 as a start-up capital? Once again, using the Rule of 72, with the average ROI of 7%, your initial capital investment should double or be worth $200,000 by January 7, 2013. Would you cash out to realize your initial investment of $100,000? Do you think that your business is worth far more than that? And when would you realize your ROI? Let me guess—in the next 5, 10, 15, 20 years or so?
You see, your business is like an investment. As a matter of fact, it’s an investable asset! You happen to be the captain, driving ROI year after year to help your business realize your ROI. But the idea of cashing out or selling simply hasn’t crossed your mind yet. Perhaps you just don’t see your business as an investable asset, but if so, why not?
It’s a misconception that you can realize your ROI in your business only by selling to a 3rd party or through an IPO as did Facebook, Twitter and Amazon, etc. The fact is, you have more options than you can imagine! There are actually 27 different methods to realize your ROI if you properly plan and execute in a timely manner.
In general there are two major types of transfer or exit or to realize your ROI. The first is Internal Transfer and the second is External Transfer.
There are four transfer channels within Internal Transfer. You can transfer to:
2) family members
3) co-owners or equity partners
There are three transfer channels within External Transfer. You can transfer to:
1) outside and retire
2) outside and continue on
Of course you are likely most familiar with an IPO, which is the channel within public transfer.
You can get an easy-to-follow chart of all transfer methods. Contact me at email@example.com or call me on my cell at 704-728-1987.
Keep in mind, the question is not about which methods or channels are best for you and your family. It’s about what you want to do after your realize your ROI. You see, your ambition, legacy, lifestyle or even social status continues on with or without you. Just close your eyes and take 15-seconds to visualize what you see yourself doing after the transfer. Can you see that? If so, now think about what would be the best transfer method(s) and channel(s) help you achieve what you visualize. The viability of all these channels can help to determine your company’s marketability or the way to realize your ROI.
Let’s take a look at Cindy. Cindy decided to create a bonus plan with cash and stock shares for eligible managers in 2010. They had forecasted number of shares, price of stocks, and carved out a portion of those numbers to predict Cindy’s company would have a value of $25MM to $50MM in 5 years. They believed strongly that an incentive plan would allow them to enable the employees to help the company grow.
They used EBIDTA (Earning Before Interests, Depreciation, Tax and Amortization) to predict how and which employees would get a percentage of company.
However, there were a few problems with Cindy’s plan:
• Cindy failed to engage a certified valuation company to determine her Company Fair Market Value.
• No one understood the incentive. Cindy did not engage the right team to communicate the incentive plan. The employees were convinced they would never see anything from the plan and were alienated.
• She engaged downstream advisors. The CPA, attorney and auditor indicated that the plan was fine. It was fine from their point of view, in that it looked fine on the books, was legal and fair.
After everything was said and done, the incentive plan never materialized and a few eligible employees left. Which was just as well, since Cindy had always envisioned selling to a third party, and was even busy interviewing many outside investors.
What would you do if you were Cindy?
Please send me your ideas at firstname.lastname@example.org, or tweet them to me @ChiaLiChien, #WhatShouldCindyDo.
And how about Linda? Linda constantly receives unsolicited calls from outside investors, each offering to pump capital into her business. Linda is intrigued by the conversations. But these unsolicited outside investors rarely ask Linda what her exit goals are.
Linda’s daughter Lucy has been in the business with her for the past 15 years. Lucy is the VP of Operations and is doing a great job. Jerry is Linda’s favorite nephew. She practically raised Jerry after her sister Becky passed away. Jerry has been VP of Sales for the past 5 years and is doing a fabulous job. Lucy and Jerry often disagree on strategic direction. Lucy likes to do things the same way year after year. Jerry leans toward introducing new products to further diversify their revenue sources.
Linda has not had a conversation with either Lucy or Jerry concerning her exit strategy. She wants to transfer to Lucy the majority of her business so that it will continue to qualify as a woman owned minority business. Linda wants both Lucy and Jerry to buy her out so she can have a sustainable income for her retirement.
That being said, Jerry, a Princeton alumni, often gets recruiting calls. Jerry could go to work for a Fortune 500 company and enjoy many incentives and a long career. Lucy only has an associate degree in graphic design. Even still, Linda wants to retain both Jerry and Lucy, as well as their ten direct reports.
In 2009, Linda got a surprise visit from a Private Equity Group, NSC (not their real name). NSC had just raised $10BB in capital to invest in Linda’s medical equipment manufacturing industry (spinal column) exclusively. NSC had done their research and indicated they believed Linda’s company was much more attractive compared to her # 1 and #2 competitors. NSC is willing to entertain a 30% minority equity ownership and serve in an advisory role on the board. As Linda was meeting with NSC, Lucy and Jerry happened to walk by and overhear the conversation.
What would you do if you were Linda?
Please send me your ideas at email@example.com, or tweet them to me @ChiaLiChien, #WhatShouldLindaDo.
How do you see your business’s marketability? Does it align with your goals? Are you considering offers that are out of strategy? I would be glad to help you make everything make sense. Just contact me at firstname.lastname@example.org or calls my cell at 704-728-1987.
Here are three considerations to make when seeking to realize your ROI. 1) See your business as an investable asset. 2) Stay focused on maximizing your business equity value and follow a viable business model. 3) Clarify your marketability as well as your transfer goals and objectives.
The good news is if you’re reading this article it means you may still have TIME to realize the ROI. Do yourself a favor. Before you jump into any channel or method, try to answer these questions:
1. After you realize the ROI from your business, what would you do next? Please be specific and be real. You can’t golf 8 to 12 hours a day and every day. You can’t be on vacation every day for 365 days a year. Be practical, realistic and meaningful.
2. How would you maximize the ROI from your business? Please revisit the transfer channels above and imagine using a combination of any of the channels.
3. To ideally create a sustainable win-win solution for both you and your candidate(s), what does you business model look like and is it sustainable?
4. Who is the best candidate(s) to continue your business legacy?
I would love to hear how you envision life after maximizing your business’s marketability. And, I would love to help you make it a reality. Contact me at email@example.com or call my cell at 704-728-1987.
About Chia-Li Chien
Chia-Li Chien, CFP®, CRPC, PMP; Chia-Li “like JOLLY,” Succession Strategist of Value Growth Institute, dedicated to helping private business owners increase their company equity value. She is the award-winning author of the books Show Me The Money and Work toward Reward and a faculty of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. Contact her at firstname.lastname@example.org or (704) 268-9378 .