Business Exit Planning

Friday, March 2, 2018

Three common mistakes to avoid when planning the succession of your business

Many small business owners are focused on running their business, rather than planning for its succession. By focusing only on the here and now, however, a business owner can set his or her business up for failure once it is time to relinquish control.

1. Delay

The first business succession planning mistake is delay. Often, business owners simply wait too long before making their plan.

Read more . . .

Friday, November 22, 2013

The time bomb facing Montana businesses

Many Montana businesses are corporations or LLC's with several owners.  Many of these businesses are sitting on a time bomb.  The bomb will explode when one of the owners dies, becomes disabled, wants to sell out, gets fired or wants to quit.

That's when the company owners will dig out the shareholders' or operating agreement to see what it says about buyout.  (There is an agreement, right?) That's when the parties will realize that their agreement doesn't have reasonable terms in place to deal with the situation.  And that's when they'll learn how hard it is to hammer out an agreement in a crisis - or face litigation.

Based on many years of experience reviewing these agreements I can say that the agreement probably doesn't even come close to providing reasonable solutions to the problem facing the company.  

The odds are high that the agreement doesn't provide a mechanism to set value that comes near to fair market value. The payment terms for buyout are likely not reasonable either.  The company and remaining owners may be faced with payment terms they can't afford - or the departing owner (or his estate) may be faced with an unsecured note that strings out payment over decades at an unreasonably low interest rate.

Then, if the agreement calls for life insurance to fund a buyout upon death, is there actually a policy and what is the death benefit?  (Often the death benefit is based on what the company was worth 20 years ago.)  Who will receive the death benefits?  If that's mixed up (as it often is), there's no guarantee that the life insurance will actually be available for the buyout.

So, was I exaggerating about a time bomb?

You already know what the solution is:  get out the agreement now - before something bad happens - and make sure it says what it should.  Based on actual company value, reasonable buyout terms and the realities facing the owners today.  I know some lawyers and CPA's who could help.

Thursday, May 2, 2013

A key to a successful business exit: "growing" an employee into an owner.


Business exit planning usually means working to successfully transfer the business to an "insider," an employee or child.  Once we've helped the business owner (1) clarify goals and (2) figure out the value of the business and how much cash flow it generates that could fund a sale, we turn to Step Three in our process: planning what needs to be done during the transition to make it successful.  

An important element of Step Three is to figure out how to "grow" a proposed successor from an employee into an owner.  As we know, there is a big difference between the skills and mindset of an employee and those of an owner.

How do we go about this "growing"?  

First, we prepare "golden handcuffs" to tie the employee to the company.  That includes a written agreement with the employee to protect the confidentiality of the information he or she will obtain.  Then we analyze the proposed successor's current skills and compare them to the skills the successor will need to be a successful owner.  

That's the easy part. Then comes the tough part: getting the current owner to share the information the successor needs to run the company.  How can we get the current owner to sit down with the successor on a regular basis to teach him or her?  That takes some good time management planning.

What does the business owner need to share?  At bottom, it's how the business owner makes the important decisions that make the business successful.  This can include (1) what the most important financial and operational metrics for the business are; (2) how to read the company's financial statements; (3) how and when to get help from the company's advisors, and, of course, (4) how to deal with the company's customers, vendors, employees - and bankers.

The business owner has never shared this information with anyone.  Lots of follow-up by the advisors is usually needed here!

Training a successor may be the most profitable use of his or her time a business owner can ever make.

Monday, April 22, 2013

What if a business owner dies in the middle of an ownership transition process?

As part of our Business Exit Planning Process, we plan for what would happen if the business owner died in the middle of the transition process.  We'll design a plan so, that if transition to a new owner is to be over a five-year period and the owner is killed in a car accident in year three, the plan will still work.

It's easy to picture what would happen without planning.  Key employees loyally attend the owner's funeral on Monday.  But they are sending out their resumes on Tuesday!  If key employees leave, the family will be left with a business that might be sold for pennies on the dollar.

We can avoid that unfortunate result with proper planning.  With a business owned by several people, we will make sure that there is an agreement among the owners that will protect the family of the deceased owner - while not burdening the remaining owners with an impossible payment obligation.

Particularly if there are no co-owners, it's crucial that key employees not jump ship.  We can address that problem with a "stay bonus" program.  The Company buys life insurance with a death benefit large enough to pay key employees' salaries - plus a substantial bonus - for one to two years.  We then tell the key employees that, if something happens to the owner, there will be enough to pay them their normal salaries plus a bonus of, perhaps, 50%.  The bonuses might be paid every 90 days.  

Thus, the key employees know the Company has money to pay their salaries, and they know they can earn a big bonus if they stay during a transition period.  They may leave after a new owner takes over, but they'll remain long enough to give the deceased business owner's family some breathing room to arrange a sale - and not at a fire sale price.

Many business owners think they're too busy to plan for their exit from their business.  But by taking the time to go through our planning process a business owner can do something for his family that may benefit them for generations.

Wednesday, April 3, 2013

Who can an owner sell his small business to?

Most Montana businesses are small.  That makes it less likely that the business owner can find a buyer with cash and borrowing capacity to just buy the business.  It makes it more likely the business owner will have to plan for a sale to a family member or employee.

There is a problem with this kind of buyer, though.  They rarely have any money!  How can they buy a business without money?

The answer: structure a sale where the buyer can use the money earned by the business itself to finance the purchase.  And plan the transaction so that the business owner is in a secure position throughout the transition.  Not waiting and worrying for years on end whether he'll actually ever get paid. 

We have been involved in a number of business exit planning matters where employees are the buyers.  We start with the proposition that the employee buyers must have some "skin in the game."  They should put up a down payment.  If it means they have to borrow against their home, so be it.

We then analyze the business's cash flow.  Is there enough cash to keep the business going and pay the seller over time?  We must compute the amount necessary to cover expenses, taxes and capital expenditures.  Is there anything left over to fund a purchase?

If so, we can capitalize this projected stream of cash to see how large a principal balance it could pay down over time.  We don't want our seller waiting for twenty years to get paid off! 

Many of the transactions we have helped structure involve a two-step process.  Initially the business owner sells a minority interest to the employees or family members.  The seller will usually finance this part of the deal himself.  This step may take five years. During this time the seller works with the buyer to teach him the ropes, to "grow him into an owner." Then as the second step in the process the buyer - who now owns, say, 40% of the business outright and knows how to run the business - borrows the remaining sales price from a bank to pay off the seller.  Thus, the seller gets paid off in perhaps six years - and not twenty. 

So, the moral of the story for small business owners:  all is not lost if your only likely buyers are employees or family members.  Working through a planning process may allow you to sell your business for a good price without taking unnecessary risk.

Monday, March 25, 2013

Planning for the Sale of the Family Business - Often Ignored

Many of our clients own small businesses.  They work hard, and they do a wonderful job of managing their businesses. Many of their businesses have enjoyed extraordinary growth over the years.

And many of these same business owners have done nothing to plan for their exit out of their business.  So, the fate of what is usually the family's biggest asset is just left to chance.

A better approach would be to spend some time - and, yes, money - working with experienced advisors to plan for the future of the business.  We have helped many business owners do this planning with our seven-step process.

We start with the business owners' goals.  When - and how - do they want to transition out of the business?  Do they have any potential successors or buyers in mind?  How much in after-tax dollars do they need from their business to fund their retirement and achieve their financial goals?

Then we focus on the hard numbers.  What is the business really worth and what kind of cash flow does it generate?  A buyer will often need to use part of the cash flow to fund the purchase.

We then analyze what can be done before the transition to grow the business, to make it more salable, to "grow" the buyers, if they're current employees, into owners and to protect the company's assets.

Next we consider how the transfer can be structured.  What can we start putting in place so that the sale can actually take place as planned?

Step six involves what we call contingency planning.  What happens if one or more of the current owners don't make it till the planned transition date?  This could involve a premature death or a dispute among the current owners.  Good planning can minimize the effect of these disasters.

Finally, we look at the owners' personal estate planning.  It's amazing how often successful, organized business owners have ignored this important tool to protect their families.

It's a lot to consider.  The process takes time and work.  But it can be critical to making sure the business owners' many years of hard work actually pay off for them and their family.

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