Exiting Through Succession Planning

Exiting Through Succession Planning

by Colleen A. Dooley, Esq., The DiFabio Law Firm, P.C., cdooley@difabiolaw.com

Succession planning is a specific exit strategy. An exit strategy involves a business owner removing her- or himself from the business regardless of whether the business continues. A succession plan is an exit strategy that involves a business owner transferring the business to a third party to continue as a going concern. There are two options as to who will be the successor that I will discuss in this article:

1. Unrelated third party
2. Related family member

Unrelated Third Party

There are two methods by which a business can be sold to an unrelated third party.

1. Sale of the corporate stock or membership interest
2. Sale of the business assets and activities as a going concern

Both of these scenarios are arms-length transactions that will likely require listing the business for sale with a broker or having sufficient contacts within the industry to independently find a third party buyer. If selling to an unrelated third party is your exit strategy, then your primary goal will be to build the business up to be as attractive as possible for sale.

Related Family Member

There are essentially two methods to transition a business to the next generation in a family:

1. Lifetime gifting of interests in the business; or
2. Devise by Last Will and Testament

This is where it gets complicated. If you’re a small business owner, chances are that your children, or nieces and nephews, grew up around the business, possibly worked at the business as employees, and have a unique familiarity with its operation. Maybe you are a second or third generation owner of the business yourself. But, what if you have a co-owner? Does your business partner want to co-own the business with your children?

Many small business owners choose to transition ownership of the business to the next generation during his or her lifetime. In the situation of a corporation or LLC (and assuming there is only one shareholder or member or a co-owner who is not opposed to the transition) the business owner could make an annual gift of shares or membership interest to the next generation. Depending on the value gifted, an annual Gift Tax Return may or may not need to be filed to track the business owner’s use of his life-time exclusion amount. In the situation of a sole proprietor, gifting of an interest in the company would result in a de facto partnership which would necessitate the involvement of an accountant or attorney not only for Gift Tax reasons, but also to prepare and file an annual partnership tax return.

If a business owner does not want to transition ownership of the business to the next generation during his or her lifetime, the business owner could prepare a Last Will and Testament to give the business to an identified heir.

However, if a business owner is in a partnership or a multiple person corporation or LLC, discussions need to be had with the co-owner about transitioning the business to the next generation and the financial “how” of the heir taking over. What if the other business owner does not want to be business partners with your children? What if the other business owner does not have another generation that is interested in succeeding him or her in the business? How will your heirs be able to afford to buy out those shares? The short answer is that one of the following three buy-sell agreements will need to be used:

1. Cross-Purchase Agreement where the departing/dead business owner’s interest is purchased by the other owners. The business entity itself is not involved in the transaction and the business owners should have life insurance on each other to fund such a buy out.
2. Redemption Agreement where the business purchases the departing/dead business owner’s interest through the use of life insurance proceeds. In this scenario, the business should own a life insurance policy on the shareholders or members.
3. “Wait and See” Agreement where the (1) business has the option to purchase back all or part of the departing/dead business owner’s interest, then (2) if the business cannot or chooses not to make the purchase, then the continuing/surviving business owners have the option to purchase the departing/dead business owner’s interest, and then (3) if the continuing/surviving owners do not want to purchase the shares then the business is typically obligated to purchase the departing/dead owners shares.

As you may gather from some of these questions, when a business is owned by multiple people, transition to the next generation of ownership can become complicated and involve multiple buy-sell agreements and ownership of life insurance policies on each of the shareholders, owned by either the other shareholder(s) or the corporation. Such planning requires the skill of an attorney, to structure the succession plan and estate plan, working with an insurance professional who is familiar with insurance products for succession planning; an accountant to ensure that tax returns are being filed for the appropriate business structure taking into account the life insurance; and a business valuation expert to determine how much the business is worth, which would be helpful in determining the amount of insurance to purchase.

As a business owner you need to have an exit strategy and develop a team of experts to assist you in either selling your business or passing it along to the next generation.

Author:

Colleen A. Dooley, Esq., Attorney
The DiFabio Law Firm, P.C.
4 Automation Lane, Suite 100
Albany, New York 12205
Phone: 518.459.1000
Email: <a href=”mailto:cdooley@difabiolaw.com“>cdooley@difabiolaw.com</a>
Web:  www.difabiolaw.com

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To Grow or Exit – that is the (Only) Question

Take the pressure off yourself with a new perspective on your business!

Business owners should be focused on planning only one of two scenarios:  Growth or Exit.  Simple as that.

Build or sell.  At Endorphin Advisors, we would argue that these are the only macro-strategies which should consume the time, focus and energies of business owners.

Successful entrepreneurs often view their businesses from a passionate point of view.  I would agree to that to some extent.  However, every single one of us should also view our businesses as something separate from ourselves and something that we can and should ultimately exit.  Honestly, there has been no human being in history that has ever stayed in their business forever!

Re-focus on your paradise (whatever that means for you)

So, entrepreneurs need a re-set.  A re-calibration of their thinking.  To re-frame their thinking to a more limited and finite time frame.  There are so many benefits to this vantage point that I can barely be able to address them all.

For example, this changes your work from a grueling marathon to a shorter sprint.  This brings into focus an endpoint destination (which we can view in a very appealing way, which gives us the added benefit of being able to dream a little bit about what we will see and do when we get to that wonderful paradise of the finish line).

Having an end-point sharpens our focus.  If we know where and when we would like to end our involvement with the business (of course, with a hugely profitable sale and glorious exit from the business), we can work backward to today and plan the route.

With a destination in mind, we can clearly see the arc of the development of the business over time and understand the different stages of our progression toward our destination.  Understanding the different stages (i.e. start-up, growth, maturity and decline) of a business, and in which your business is today, enables business owners to appropriately shape their actions and expectations with regard to their competitive position in the marketplace.

“If you do not know your destination, any path with get you there.”
– Ralph Waldo Emerson

Build a fortress

From a practical viewpoint, good business planning combined with an element of exit planning, is simply good estate planning.

All of us human beings are frail and perishable.  We have an expiration date, though fortunately that date is unknown.  This means that, for the benefit of our families, employees, partners and customers, as well as for ourselves, we should build our business in such a way that it is durable.  It should have the structure, processes and resources to be able to continue operating, whether to continue providing for our family or for a new owner.

Keeping that view in mind should help us focus our attention and efforts towards building a business that has established practices and repeatable processes.  There should be measurement applicable to everything, and responsibility (outside of the owner of the business) distributed across the workforce.

Make your business attractive for buyers (whoever the “next” owners may be), and you will reap the benefits until then

A potential buyer will find your business attractive for the “built-in” capabilities, expertise and repeatable processes of a business. That is also something every business should drive towards, as it’s good business practice.

Businesses that are most “acquirable” are those with built in knowledge, skills, capabilities and relationships.  That is what effective exit planning does for a business, and for the business owners.

What else makes a business attractive from a potential buyer’s perspective?  Here are some items that will make the due diligence process – the deal-killer time – go more smoothly:

1. Audited financial statements
2. Accurate sales, accounting and data records
3. Copies of income tax filings
4. Low or manageable debt, receivables outstanding relative to revenue/income
5. Realistic asking price, supported by recent valuation and information
6. Increasing revenue trends (3-years)
7. No unresolved legal/liability/tax issues
8. No surprises!
9. Track record of profitability (3-years)
10. Strong management team (other than seller/owner) and experienced employees
11. Appropriate HR-related practices, hiring practices, performance reviews, etc.
12. Strong operational procedures and practices (documented)
13. Strong product line-up with track record of innovation
14. Appealing, organized office, store, factory or physical plant
15. Loyal, repeat customers
16. Updated arsenal of marketing tools (web site, newsletter, brochures, customer lists, standard proposals, etc.)
17. Appealing competitive environment (any barriers to entry for new competitors?)
18. Appropriate level of geographical distribution of sales (not too focused in one area)
19. Strong business relationships (with vendors, partners, service providers)

If you are thinking about selling your business, you can have a significant impact on the ultimate value that you receive for your business with the right preparation and a good plan.  To achieve the best outcome, make sure to have a thorough game plan, work with the right advisors, and give yourself some time to do the groundwork and get the results “baked in.”

To find out more about how to prepare your business for sale, and the best practices of exit planning,

please don’t hesitate to visit www.EndorphinPartners.com or call 518.250.9035.

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About Endorphin Advisors & Endorphin Partners

Endorphin Advisors is a unique management consulting firm and marketing agency. We help businesses develop and implement short and long-term strategic plans, while also providing day-to-day business development, marketing and financial services to discerning clients committed to aggressive growth.

Endorphin Advisors specializes in Internet (inbound) marketing; online lead generation and nurturing strategies; content development strategies; and development of the web properties required for effective inbound marketing, including web sites, blogs, social media, content and email marketing tools.

Endorphin Advisors was started in 2005, and re-located in 2011 from Silicon Valley to Albany, NY. Find them at http://www.EndorphinAdvisors.com and http://www.EndorphinPartners.com.

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Planning To Cash In Your Business For A Comfy Retirement? You Have A 1 in 4 Chance of Success

Planning To Cash In Your Business For A Comfy Retirement?

Small Business Owners Have A 1 in 4 Chance of Successfully Selling Their Business.

Read on to find out some of the things that make small businesses less desirable than larger businesses, and this will give you some ideas about how to prepare your business to be sold.

Here are some statistics on sales of businesses in the U.S.

• Less than $750K revenue, 18% are sold
• $750K – $2M revenue, 25% are sold
• $2M – $30M revenue, 29% are sold
• $30M+ revenue, 33% are sold

Source: CABB & Tom West

This means that if your business has less than $750,000 in annual revenue, there is less than a 1 in 5 chance that you will be able to sell it. Even once you get up to $2,000,000 in sales, there is only a 1 in 4 chance of selling your business.

This means that the higher the revenue, the better chance of selling the business.

This is not so much just a revenue target, but reflects the fact that larger businesses have some things that smaller businesses generally do not:

1. More established operating systems & procedures
2. Stronger management teams
3. Specialized, experienced staff
4. Better marketing strategies and tools
5. Ability to effectively compete in their target markets
6. Broader product or services offerings
7. Deeper client bases with repeat customers
8. Wider geographic reach
9. More established partner, alliance and vendor relationships

If your retirement plan and golden years are relying on you successfully selling your business for a nice, big chunk of cash, you may have some work to do between now and then to increase your odds of achieving that comfortable, leisurely retirement.

Learn more about exit strategy planning and some of the things you can do before you try to sell your business that will attract buyers to your business.

Please let us know if you have any questions.

Thank you for your time and interest.

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New Web Video About Endorphin Advisors (from Erik Bunaes)

Endorphin Advisors adds new video on its Flagship web site at www.EndorphinAdvisors.com.

In new video, Erik Bunaes, President & Principal, discussing Endorphin Advisors’ services, capabilities, experience, team and web properties.

More videos are on their way.

Thank you for your interest and support.

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Business Owners’ Perilous Decision: When Do I Sell Out?

We Boil Down The Most Difficult Decision Every Business Owner Must Make At Some Point In Their Lives

One of the single most important calculations to a business owner at some point in time, particularly when contemplating their retirement or “end game,” is the balance between “what is my business worth?” and “will that be enough to comfortably meet my retirement needs?”

In most cases, both of these figures are relatively vague – or completely unknown – numbers when the typical business owner begins to factor in the variety of economic, business, financial, personal and estate planning variables that likely have an effect on those two main figures.

Value of Business Side of Equation

On the “what’s my business worth today?” question, the true value is what a buyer is willing to pay for your business at a given time.  Potential buyers will take into consideration all kinds of factors including:

1. profitability and revenue trends of a business
2. asking price
3. presence of intellectual property
4. expansion opportunities
5. quality of financial and accounting statements and records
6. relationship with landlord(s) and lease obligations
7. experienced employees and managers
8. quality and distribution of customer base
9. market trends of customer base
10. industry outlook
11. barriers to market entry or competitive advantages maintained by seller
12. economic conditions and outlook
13. availability of financing and credit

This is not an exhaustive list, but you can see some of the different factors affecting the value of a business from a buyer’s perspective.

From the seller’s perspective there are the inevitable “what’s the multiple for my business” question.  That refers to vague rules of thumb such as “X business is worth 1.5 times revenue” or X business is worth 2 times EBITA, net earnings or some other units of measure.

The problem with rules of thumb is that they vary from industry to industry and company to company.  More importantly, they are vague and often misleading.

The right route is to obtain a certified opinion of value (COV) from a certified business appraiser.  For a generic small business, this examination should run in the $4,000 to $6,000 range (higher or lower depending on size of business, it’s complexity, and the appraisal firm engaged).  For larger and more complex businesses, the cost can be multiples of that cost.

Just remember that a “certified opinion of value” is an opinion of value and not a sale price.  While the COV is based on objective analysis and uses direct comparison to relevant, current industry data, the actual “value” of a business is the value of it in the eyes of the buyer.  There is no guarantee that you will get a sale price as high as the opinion of value.  You might get higher.  Or lower.

Retirement Needs Side of Equation

Now on the other side of the larger equation of “should I sell now,” is the “how much do I need to comfortably meet my retirement needs?” question.

For this side of the equation, it’s prudent to address this in consultation with a qualified wealth management professional.  There are many variables and scenarios that should be included, along with some detailed financial calculations (net present value of money, estimated investment returns, estimated interest rates, projected taxes, etc.), to do this with any accuracy.

Steps Forward to Addressing Equation

To avoid the vague soul searching of “should I sell now” and “how much is my business worth,” the two gut-wrenching parts of this decision, there is a relatively clear path forward.

The solution is to seek the counsel of two qualified, experienced experts: a business appraiser, and a wealth management professional.

Undertake the two exercises of obtaining a current COV from the business appraiser and a retirement needs analysis from the wealth manager.

Now One Clear Equation

Using the retirement needs analysis as your baseline, does the COV exceed your desired retirement needs?

If so, you have the green light, all other things being equal, to move forward with putting your business up for sale.  (Now comes the part of finding a qualified, experienced mergers and acquisitions advisor, investment banker or business broker to handle the marketing and sale transaction of your business.  Which type of professional depends on the size and complexity of your business).

If the COV does not exceed your desired retirement needs, hold off selling your business for now.

Selling My Business Now Is Not In The Cards

If selling now doesn’t look like the right move, spend your time on improving your business so that when you do an update of this analysis, and the light is green to sell, you are ready to go!

Exit Planning Services From Endorphin Advisors

Endorphin Advisors has an experienced team of advisors to help you through this process.  We offer confidential, expert advice, counsel and project management services to business owners contemplating the sale and exit from privately held businesses.

Endorphin Advisors has a full workshop on preparing companies to be sold.  Please contact us if you are interested in learning more or wish to schedule a workshop.

Exit Planning Services From Endorphin Advisors

Please let us know if you have any questions.

Thank you for your continued interest and support.

Erik Bunaes

Endorphin Advisors

5/11/10

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Endorphin Advisors – SlideShare

Endorphin Advisors has a SlideShare account where we post copies of presentations, courses, workshop content and a wide range of other useful information.

Please see our SlideShare account at: http://www.slideshare.net/ebunaes.

Let us know if you have any questions or would like to have us lead a workshop, class or training session on one of the business, strategy, leadership or marketing topics in which we specialize.

Thank you for your support.

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Endorphin Advisors – New One Page Menu of Services

Endorphin Advisors is a management consulting firm and marketing agency.

To easily review the range of services offered by Endorphin Advisors, we have published a new one page menu of services.

See the Endorphin Advisors “News” page to view this summary.

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Top 10 Mistakes In Selling a Business

Top 10 Mistakes Made When Selling a Business

Selling a business takes both careful preparation and the ability to handle a complex transaction. Since most business owners are not experienced in selling a business, they will make mistakes along the way. Here are 10 of the most common mistakes to avoid:

1. Not learning the ropes. Like anything you do in business, there will be a learning curve when it comes to selling a business. Learn the terminology and how the selling process typically proceeds so that you can structure the deal properly and come out a winner.

2. Setting a price too soon. You set yourself at an immediate disadvantage if you state a price without knowing the potential value of the business. Do not sell yourself short by setting a price too quickly. Assess the value of your business very carefully with your accountant or financial advisor and your attorney, and then set a price. Remember, you can always come down, but you generally cannot go up once you have determined your selling price.

3. Selling too quickly. Unless you have to sell the business quickly for financial or personal reasons, you should not rush to a sale without exploring all of your options to determine whether or not you are getting a fair value for your business.

4. Lack of confidentiality during the sales process. Once word gets out that the business is being sold employees may leave, vendors may hold back on deals, and customers may head to your competitors. The value of your business can drop quickly if you do not maintain confidentiality.

5. Not increasing the value. Owners who know well in advance that they want to sell the business have time to build up the value and make it more attractive to buyers. There is a lot to be said about first impressions, and in this situation, a poor first impression can have a significant impact on the potential selling price of your business.

6. Not identifying the best buyers. You need to spend time on serious buyers only. If a potential buyer is not pre-qualified or does not appear to be prepared to make an offer, you may very likely be wasting your time. Do not spend time with the wrong buyers.

7. Being unprepared to defend your valuation. If you have worked hard to create a value for your business, you should be prepared to defend and substantiate that value. Prepare backup materials to defend the value of your business.

8. Failing to negotiate. How much leverage you have may depend largely on how many potential buyers are out there. Nonetheless, you need to be prepared to negotiate, and for this reason you should have professional guidance when you sell a business.

9. Waiting too long to sell. Many business owners regret not selling at the most opportune time. By waiting, they subsequently encounter increased competition or have a product that has declined in value because of economic conditions. If you are thinking of selling, pay attention to changes in the economy and to the state of your industry, and look for the best selling opportunity.

10. Not using the skills of professionals. You should seek out sound business and legal advice from professionals who have been involved with the sale of other similar businesses. Selling is a complicated process and not one that you should take on without expert assistance.

(From AllBusiness.com)

If you have questions about the selling process, or are starting to think about selling your own business – whether that may occur in the next year or two or several years down the line – contact us to learn more about how we might assist you with the process of preparing for the ultimate sale and exit from your privately-held business.

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