Joan M. Ridley, CEPA, CBI, CFP®
That’s a loaded statement. Give serious thought to what it means to your client’s son, daughter, employee(s), or whoever he or she is talking to. To them, it could mean something entirely different than what he intends. Or maybe over the years, exactly what he intended has changed.
Such a statement to family or key employees could mean that he intends to gift a business interest to them. Or, that maybe he will sell it to them for less than its true value. It could also mean that he will finance a sale for below market price and terms, or with no expectation of a down payment. Either way, he needs to be clear about his intent and his capability to follow through, especially his financial capability.
Sharing his good fortune can be a wise and generous strategy. Choosing the best strategy, and executing it correctly, can add significant value to his business should he decide to sell to an outside third party. Choosing the wrong strategy could deter buyers or result in unfavorable terms down the road. Gather all the facts about his situation and the pros and cons of all feasibly strategies before moving forward with any recommendations, or before encouraging him to make promises that he might not be able to keep.
Questions to Ask and Facts to Consider
- What are Your Client’s Motives
- Reward employees for past performance and past loyalty
- Secure their loyalty until after a third party sale is closed
- Keep peace in the family
- Maximize the value of his business
- Reduce his estate tax
- Experience pure joy of his altruistic intentions
- Commitment to follow-through because of promises made
- Fear that employees will leave if he doesn’t share a piece of the business
- Shift long work hours and risks of ownership, while drawing a handsome salary, perks, and prestige
- Have the final say about important strategic decisions
- Keep the business in the family
What are Your Client’s Needs and Considerations
Is he at all dependent on income from the business or income from the reinvested equity, or, is he independently wealthy without any further economic benefit from the business? He should seek advice from his financial planner and tax advisor about how much is financially feasible for him to give away, or sell for less than the value he might receive from an outside third party
Impact on other family members if he transfers ownership to only one of them
The tax ramifications of any strategy he is contemplating
The impact on company value in the eyes of the ideal buyer. Could this strategy actually reduce the saleability for the business. Get expert advice before answering that question.
The impact on key people if he is not in a position to follow through on promises made. Will they leave.
Impact on company value and sustainability, and, future personal wealth
What About the Proposed Successors
- Are they credit worthy, especially if your client will finance the transaction
- Is the proposed new owner’s spouse totally on board with the risks and responsibilities of business ownership
- While they might be stellar managers, are they cut out for business ownership which requires a very different skill set
- Will the other employees accept your client’s proposed successor in an ownership position
Your Next Step
Before giving any serious consideration to a strategy, bring together your client’s advisors who have experience with such matters. Give them an opportunity to gather the facts help. Help him carefully consider all of the benefits and drawbacks before moving forward, or before he makes representations that he might not be able to fulfill.
That group of advisors should include these and possibly others:
- Certified Exit Planner with expertise in all 34 exit strategies
- Business consultant to analyze all 50 value drivers
- Estate planning and corporate attorneys
- Transaction tax advisor
- Client’s CPA
- Credentialed financial planner
- Credentialed business life insurance agent
Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.
Copyright 2015 Joan M. Ridley
