Our Fifth Family Member; The Business
My family owned a 24/7 diner for twenty years. Like most family businesses, it was essentially another family member. We all worked there. We talked (and argued) about the business constantly. And, each family member understood the importance and underlying commitment we had to the business as well as the impact and consequences that its success or failure would have on us; on an ongoing basis and for our future. When we made the decision to finally get out of the business—a decision that came as a result of neither my brother nor I wanting to take it on, and my dad’s earned and age-appropriate desire to retire—the options seemed clear. We’ll sell the business. My parents will retire on revenue from the sale. And, my brother and I would resume the pursuit of the careers we went to college for. (record skipping sound here) We quickly learned that this process would not turn out to be as easy as we expected.
How would we sell the business without disrupting existing business practices, personnel and customer relations? How will ownership be transferred? How will we fairly valuate the business? How long will the transition take? What options are available as a back-up plan (i.e. bring on an investor, partner, other)? These questions became front and center and became the second full time job of my father and my brother? Sure, there were a lot of books and information on how to start a business as well as how to grow a business but very little information existed on how to leave a business successfully and optimally. Had we planned for this moment and had an exit strategy early on, it’s likely this experience and process would have been easier at the time of decision.
Business Succession Planning
According to Entrepreneur magazine, business succession planning is defined as the process of planning for the day a business owner decides to step down from their leadership role. This could mean many things to various business owners. For some it could mean passing on the business whereas for others it can mean a well thought out exit strategy. At the end of the day, the business owner wants out. Therefore it’s important to know what your options are. Following are a few long-term and short-term involvement strategies according to Daniel Richards in “Writing a Business Plan-Planning Your Exit Strategy”:
“Exit Strategies for Long-Term Involvement
- Let it run dry: This can work especially well in small businesses like sole proprietorships. In the years before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability.
- Sell your shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. You leave the firm cleanly, plus you gain the earnings from the sale.
- Liquidate: Sell everything at market value and use the revenue to pay off any remaining debt. This is a simple approach, but also likely to reap the least revenue. Since you are simply matching your assets with buyers, you probably will be eager to sell and therefore at a disadvantage when negotiating.
Exit Strategies for Short-Term Involvement
- Go public: The dot-com boom and bust reminded everyone of the potential hazards of the stock market. While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds.
- Merge: Sometimes, two businesses can create more value as one company. If you believe such an opportunity exists for your firm, then a merger may be your ticket to exit. If you’re looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on. If you don’t want to relinquish all involvement, consider staying on in an advisory role.
- Be acquired: Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price meshes with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
- Sell: Selling outright can also allow for an easy exit. If you wish, you can take the money from the sale and sever yourself from the company. You may also negotiate for equity in the buying company, allowing you to earn dividends afterwards — it clearly is in your interest to ensure your firm is a good fit for the buyer and therefore more likely to prosper.”
Certainly another option is to pass along your business to a family member. At the very least it makes sense to have a business succession plan like this in place just for tax purposes, in the unlikely event of death of the business owner. Estate taxes can run anywhere from 37 – 55% if you do not have such a plan in place, the heirs have only nine months to pay this. So the first thing to do in preparation for succession is to decide who gets the business next. Who runs the company is very different from who owns the company so be realistic in whom you choose. Try to find an heir that is interested in running the business and plan accordingly.
There are several critical key components to business succession or strategic exit planning. These include:
- Current and future valuation of your business. There are several rules of thumb multiples times revenues and/or net revenues for various businesses. In addition, valuations will have an impact on tax liabilities. Keep in mind what you value your business at could be significantly different than what the IRS thinks. Therefore, it is best to consult a CPA for the valuation equations and tax savings that suit your business.
- Transitional management and key personnel: It’s important if a successor to your business, albeit family member, employee or other, is in place, that this person be chosen wisely and is understood by employees of his/her role.
- The proceeds of and options for strategic ownership change. Will it be cash? Stock? Financing over time? Or some combination of all of the above? What is the proper interest rate for a financing deal? What are the consequences in case of default? If some percentage of ownership is retained, how will that impact you from a tax standpoint and changes in the business over time (i.e. debt, bankruptcy, etc.)?
- Tax implications and/or savings methods. A friend of mine recently bought out his two partners who received a huge payout but had tax implications beyond their expectations based on value and deal they agreed to. Once again, it’s best to consult an experienced accountant for business transitions like this to avoid any severe tax implications that might occur
- Communication with key stakeholders such as employees, customers and shareholders. Selling a business can cause great uncertainty among key stakeholders in your business to the point of employee exodus, supplier freezes, and/or late paying among customers. It’s important to have a clear communications strategy and know the risk and consequences of what information is shared, when and how much!
After a year of secretly keeping the business ‘on the market,’ and wavering thoughts of available options mentioned above, my dad eventually sold his business (several years ago) to a qualified buyer. A lot was learned in the process including the fact that had business succession and strategic exit planning were in place, it might have been smoother, less stressful and more streamlined. The time will come, when all business owners will want to move on; either voluntarily or involuntarily. Having a sound plan in place now is in yours and your business’ best interest when that time comes.
About the Author
Angelo Biasi is General Manager of SMART Marketing Solutions, LLC, a leading full-service integrated marketing company in Naples, FL since 2001. He has helped create and execute marketing plans and integrated marketing solutions for companies such as Playtex, Bic, Rogaine, Tauck, and over 35 colleges and universities, to name a few. Angelo has an MBA in Marketing from the University of Connecticut and teaches Marketing at New York University where he has for over five years. For more information or to learn more, email him at abiasismartmarketingllccom (abiasismartmarketingllccom) , visit www.smartmarketingllc.com or call 239.963.9396.