Anita W. Sherman, CPA, CGMA

Achieving Success in Transitioning and Retiring from Your Business

Lack of Planning – 35%50%

Not UrgentDifficultLack of prior experience

What’s Going On?

Retirement Savings• 19% between 55-64

• $1,000,000 at 65 will generate $40,000 per year for 30 years

What’s Going On?

Baby Boomer Generation • 40% retiring by 2020

Family statistics –• 1/3 of family businesses pass to the 2nd generation• 13% make it to the 3rd generation

• 40% of Work Force

What’s Going On?

Age Range 30 to 80 A few 3rd, 4th and 5th generation Sellers, buyers, family businesses, planning, employee

ownerships, company repurchase stock Strength of Independent dealer network• Purchasing volume• Impact on gross margin• Profitability

Background Info

20.5 billion annual sales

77% Staples and Office Depot/Max

Walmart and Best Buy

Online Retailers

Current Trends

Annual SalesStaplesOffice Depot/MaxOther

9,714 office supply businesses - 13,578 locations Of the 13,578: • 7,600 no employees, • 3,800 - 1-4 employees • 400 - 20 or more employees

Current Trends

Sales per employee - $204,000• Wages – 10.8%• Marketing – 1%• Pre-tax net income – 2.4%

The K-12 students increasing“This is the greatest business in the world – everyone needs something that we sell”

Current Trends

Big Differences -• 10% of gross

• 15-20% of gross

• 50% of gross

• 100% of gross

Valuation

“Valued Dad’s interest higher than the formula we use in acquisitions”

“Inventory at cost less 5-10%”

“15 times owner’s average salary”

Valuation

What the experts told me?• 25% of gross sales plus inventory

• 150% of “Seller’s Discretionary Earnings” /“Owner’s Cash Flow”

• Capitalization rate of 12% on Earnings before Interest and Taxes / EBIT

Valuation

Strategies to Increase Your Value

• Sales volume• Profitability• Management team• Monitor industry trends

“I’ve had to learn to be tougher and be quicker to pull the trigger on non-performers, especially during the recession”

“I use other members of the co-op as mentors or for business ideas”

Strategies to Increase Your Value

Options

Sell to an outsider-

Sell to Passive investor or non-independent dealer–

“We didn’t consider this, because employees have been loyal and we wanted them to keep their jobs”

Sell to new owner operator/Sell to another independent dealer

Close the doors – “This may be what happens for small dealers without a plan”

Options

Acquisition mode and then sell to Management Team

“Trying to keep prior owners happy is hard because they need to act like an employee now”

“If you plan on changing the “company name” of the acquisition, plan on losing 20-25% of your revenue. However, changing the name may be advisable to create synergy”

ESOP

Options

Sell to key employees• Cash or sweat equity

• “got ½ the price as a down payment and getting monthly payments”

• “If my kids aren’t interested, I have employees that could manage the company”

• “We’re thinking we can build a management team that could own part of the company and provide a return on investment for retiring shareholder(s).”

Options

Sell to key employees with a buy sell for next generation family

Management team bridge Give to key employees Company buy back Sell to next generation Gift to next generation

Options

Quotes

• Dad left because he was burned out• I almost quit over a disagreement with my dad• Plan was for dad to reduce his work schedule by 1 day per year,

went from 5 to 4, stuck at 4, then fully retired• Dad gave me ownership interest• I can’t give it to my kids because I need to get the value out of

the business for my retirement

Best Option?

Best Option

Some Questions –

• How much money will I need to retire?• What is my company worth?• How many years do I want to keep working?• Are family members interested?• Are they qualified now? Could they be coached? Enough time?

• “My dad let me experiment”• “I learned a lot from my dad”• “This business isn’t as easy as it was 25-30 years ago”• “We’re transitioning over 5 years”

Quotes

Questions

Do I have a strong management team to ensure repayment of debt, if I sell to them?

Do we have a good history of increasing profitability?

Are we big enough to cover ESOP admin expenses?

Is our corporate culture open to employee involvement?

Family Businesses

Do you have a - “Family Business” or a “Business where some family members work”?

Member Quotes:

• “They had worked in all or almost all aspects of the business”• “Leave business at the business, don’t mix with family time”• “The oldest son isn’t necessarily the best for the CEO role”• “This isn’t a business just for sons. Consider your daughters”• “Compensation, titles, ownership issues with siblings”• “Wives always think their husband carries more than their share”• “Don’t pressure anyone to join the family business”• “If you work for me, you’re going to work harder than any other employee or you won’t work for me”

Getting Ready to be Retired

• “It took dad 10 years to figure out what to do with himself after retirement”• “I want to always have a place to go”• “I still go in to the office but I don’t rush in first thing”• “My wife wants me to retire”• “I’m looking forward to retirement. I want to do other thing; travel, spend time

with my grandkids, work on house projects., etc.”

Developing Your Action Plan

Start early Identify the best option(s) for you Consider internal vs. external Determine your action plan Communicate Stay on track Be flexible

More Quotes:

“We started planning for retirement in our mid 40s”

“Dad retired and became chairman of the board and son is CEO. During the day, dad reports to the son. After hours, son reports to dad.”

“Make sure your financial statements are accurate and up to date”

“A business valuation could cost 10-20k”

“I’m going to get serious about this planning when I’m 57, so I can be ready to leave when I’m 62”

More Quotes and Tips:

“A well written shareholder agreement that addresses all potential events is critical”“We make sure all spouses of shareholders know our CPA & attorney and understand the shareholder agreement”“It’s a good idea to prepare for potential tragedies, in case they ever happen”“Our members really need to be thinking today about their transitions – Time goes so fast”

Contact Information

Thank you

Anita W. Sherman, CPA, CGMAGreenwalt CPAs, Inc.(317) 241-2999asherman@greenwaltcpas.com