Issue#1: Welcome… to the first issue of our bi-monthly bulletin

In this, the première issue, we set the stage for future issues by introducing the concept of capital engineering and explaining why it is different from traditional accounting and legal advice.

Why do you own your business?

The bottom line of business ownership is simple: We own our businesses to make money.

But wait a minute. Is that really why we own our businesses?
How do you suppose the thousands of private business owners who are currently trying to exit their businesses with the money their business has made would answer this question?

Or, what about the business owner who wishes to bring in a new production line, or execute some other significant growth strategy requiring a substantial chunk of capital?

Isn’t gaining access to capital as efficiently and effectively as possible the real reason we own our businesses?

Success then would mean having the ability to transfer your business’s capital intact to any or all of the following:

  • Your personal account
  • The succeeding generation of owners
  • Operating accounts to finance business growth

But, what happens when capital is trapped in your business?

What happens is a tragedy, your business dies either before you do, or it dies shortly after you do. And then, everyone involved in building the business loses more than their livelihood; they also lose a good part of themselves. The relationships developed, the energy invested, the purpose of our being, our legacy and peace of mind for the rest of our lives is lost, in addition to the economic fallout experienced by the community at large.

(We have seen there are only Five Fates awaiting you and your business. Only one of them is palatable to most business owners but the odds are steadily shrinking that you will enjoy Fate #1.)

Why is capital trapped in your business?

There are two answers.

First, most business owners are unable to prevent the demise of their companies because they are unaware of the devastation caused by conventional financial advisory.

Second, the primary role of conventional financial advisory is a “deathist rationalization.” In other words, it is the acceptance of onerous taxation and the inevitability of business failure at each point of generational transfer. Traditional advisory focuses on tax liability at death as opposed to cash realization during one’s lifetime.

A financial reporting system or structure that does not focus on and solve for the ultimate transfer of the capital to the owner is incomplete and misguided. Conventional accounting analysis and recognition of earned profits is illusory. Accounting principles alone cannot in real terms, deliver the capital intact. In order for an accounting system to be truly meaningful and effective, it must expand its frontiers to incorporate an all-inclusive approach that emphasizes a basic tenet of the discipline of finance – capital allocation.

This is where Capital Engineering comes in

To begin, you must believe your enterprises need not die with you or before you and you must have the courage to do something different.

When you are committed to doing what it takes, we use our state-of-the-art analytical technologies to empower you to make decisions based on solid, relevant and actionable information and knowledge. Then we develop unique integrative strategies supported by financial instruments that provide insulation against the corrosive effects of taxation. The final element in the capital engineering solution engages major financial institutions that are ready and willing to play their part in insuring a vibrant future for your private enterprise.

What works best?

One of the reasons conventional advisory fails is its reliance on a relatively limited set of strategies and solutions. This means your business is forced into the shape of the solution instead of a solution being developed that is tailor-made for your business.

When asked “What works best?” by a prominent financial advisor, PROCORP founder and CEO Bill Sodomsky replied, “Everything and nothing.

The take away here is that what works best is different for every private business owner… in every case. This means in part at least, what works best is having the ability to face the hard decisions, to be able to manage even embrace an uncomfortable level of doubt, and take responsibility for the future of your business. Abdication of responsibility in these areas will lead to the death of your business.

In the next edition of The Capital Transfer Bulletin, we will explain the proprietary diagnostic tool we use to assess every unique situation. It is called The RV Score® and it combines a number of quantitative and qualitative inputs which in addition to measuring the overall financial well-being of a company, focuses on the true liquidity potential of the enterprise at a given point in time.

The RV Score® can isolate expectation from reality in a marketplace that has so few benchmarks and may be used to predict whether or not, private business owners will have the means and the qualities to realize the investment value in their enterprise.

The Five Fates

At the end of his or her working days, every business owner faces one of these Five Fates and outside of only one of the categories, the prospect of a happy ending is precarious at best.

Fate #1. The lottery winner

These are the one per centers that will sell their business for a lot of money and move off into the sunset. These companies are often unique in terms of their product, services, or markets. They may have proprietary technologies or systems that large corporations want and are prepared to pay for.

Fate #2. Business owner wants to sell but cannot find a buyer

These are businesses for the most part that have little in terms of uniqueness and a low entry threshold for ambitious enterprising individuals. Basic construction companies, basic service companies, small retail outlets fall into this category. It usually makes no financial sense to purchase these companies where the predominance of value is expressed as blue sky or notional worth.

Fate #3. Business owner wants to sell but cannot get the price they deserve

These are businesses that have some uniqueness, a fit with other corporations, or a client base that has quantifiable value. The problem for the buyer however is the cost of the purchase. Most buyers do not have the cash in hand and are thereby dependent on future cash flows to meet financing arrangements. In other cases, investors are comparing other investment opportunities where security, pay back periods, ease of maintenance, and liquidity are serious concerns. In other words, the vendor is competing against publicly traded corporations for investor dollars. Private ventures are by their very nature risky and risk is offset by diminishing the sale value.

Fate #4. Business owner does not want to sell and will die in their business

These are business owners who simply want to continue working until the end of their lifetimes or have no other choice. They usually do not expect the enterprise to survive them. Often these businesses have little value by the end of their life cycle and without some form of funded estate planning, no value will remain for family members.

Fate #5. Business owner does not want to formally sell the business because family members or a management team will be taking over

In either case, the next generation has little cash to give to the existing owner. These businesses are often good enterprises with good talent, markets, and systems. The business will likely continue beyond the founder provided there has been some basic estate planning in place and the liabilities of the corporation are funded.

The Five Fates are… inevitable

Each and every private business owner will fall into one of these categories. There is no escape. Outside of the lottery winners, all of the others share one common denominator as they approach the final years of their careers. The business owner wants to retrieve either for himself or his family the investment he has in his business. He wants what the business owes him. Sale or no sale, the government is going to get its share, so why shouldn’t he?

Forward to colleagues, advisors and friends

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