Some Day This Business Will Be Yours

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         

I Always Thought the Business Would Go To My Children, But Now I’m Not So Sure

Joan M. Ridley, CEPA, CBI, CFP®

See if This Sounds Familiar…  
You have labored long and hard in your business for decades, and, to your credit the business is thriving.  Your son or daughter has worked in the business and you have paid him a fair wage. (I will use the male gender only for the sake of simplicity.)  Somewhere along the line you might have mentioned or insinuated that someday “he could or would take over the business”, or, that “the business would be his”.    If you are like most business owners, you probably did not give much thought at the time about what this meant to your son, to you, or how you would make this happen.  

You might also have overlooked the impact such a transfer could have on the rest of your family, your employees, and the business – not to mention the impact it would have on your personal financial situation.  As the years slipped by, maybe you did not prepare for such an important transfer of power or wealth.  Now you are thinking about leaving the business and spending your days doing the things you always dreamed about doing.  But, the reality of the situation is keeping you up at night.  Maybe you try to think through the situation, but you keep going around in circles.  

Maybe you are wondering:

• Should you transfer your business to your children
• How to transfer the business to those children who are active in the business and what to do for those who are not
• How to provide for your family’s financial security
• How to keep the business in the family and still be able to pay estate tax
• How to avoid having to resume control if your kids prove unable meet the demands of ownership
• Should you gift the business to them or should they pay for it, and if so, how much

How to Get Off the Merry-Go-Round
Before you can begin to deal with the situation, you will need more facts.  You need to know: what your business is worth; how much cash you need to walk away with after tax; the facts about estate, gift, income, capital gains, and state tax; community property law; how long the transfer process will take; if it is feasible to gift part or all of the business to your offspring; and, if you will sell it to him, how much you should finance. Other areas need to be explored such as what is the future for your business, your industry; and the economy.  You also need to assess those aspects of your business that add or detract from the value, and, if your son or daughter is capable of developing strategies to deal with those issues, especially if you plan to finance the sale.  This is a lot to think about all at once.  No wonder you are having difficulty sleeping at night, much less making decisions. The key to getting off the merry-go-round of indecision is to know how and where to gather the facts, how they all fit together for your benefit, and what advisors to retain to help you make sense of it all.  

You Need to Know

• Your needs, capabilities, and desires
• Your offspring’s needs, capabilities, and desires
• The current and future position of your business
• Federal and state tax issues and other laws

Does Your Kids Have What It Takes?
Once you have determined that transferring the business (either selling or gifting) to your offspring makes sense for you, the next step is to assess his natural ability and preparedness for ownership.  An independent viewpoint would be helpful here since a parent’s viewpoint is understandably biased.  In order to assess the situation, answer the following questions:

Family Succession Check-List

• Does your child really want to own the business, or is he just trying to please you?  
• Has he been groomed to successfully run all aspects of the business?
• If he is lacking in specific skills, is there enough cash flow in the organization to hire someone to perform those tasks?
• Does he have the passion and entrepreneurial gene to drive the business forward and deal with inevitable changing conditions?  
• Does he voluntarily work the necessary hours now to get the job done?
• Does he identify issues in the organization that need to be addressed, even if you don‘t agree with his views?
• Does he take the initiative to seek solutions?
• Do the employees and key people look to him as a leader?
• Does he maintain a lifestyle free of addictions and one that commands respect?
• Does he have a home life that accommodates the demands of a business owner?
• Is he insurable?
• Will you sleep at night if he takes over?    

Can Your Child Lead the Company as Well as Run It?
Just because your adult child is good at “running” the business in your absence, this does not necessarily indicate that he could step into an ownership role and be successful.   Running the company and leading it require two entirely different skill sets.  Effective leadership requires vision and courage. It also requires the ability to: develop systems; to delegate; and to select and command respect from the right talent. When your children were young you left them with a capable baby sitter, but would you have wanted that same person to be totally responsible for raising them?       

Beware the Position of Entitlement and Other Issues
Have a serious discussion with your child about his position.  Once you determine that he is qualified to lead and run the business, determine if he really wants to step into that role.  Does he have other career aspirations? Would he be willing to forsake a personal relationship now or in the future that would require that he relocate?  Is he assuming that he will receive the business as a gift?  Does he think he already has an equity or legal interest in the business?  This discussion might be more productive if you have some outside help from a professional such as a family business counselor.  If you are not absolutely positive that your offspring would be successful at running and leading the business, or if he is too young for you to even consider such a move at this time, consider hiring a CEO and others to groom him for ownership.   This will buy you time to delay this important decision until you can properly assess the situation while allowing you to spend more time on your own outside interests.

Current and Future Position of the Company
The next step is to position the company for success.  A written strategic business plan is important.  Without it, you might be setting your successor son or daughter up for failure. Test the waters by involving him or her with the professionals who are developing and drafting the plan.  It is an excellent way to further assess his or her abilities. 

Assess Your Options
Invest the necessary dollars to work with quality trusted advisors to help you examine the options and issues, and then develop and implement strategies.  You might find that there are solutions that you had not considered.  At this point you need to address the various tax-saving strategies involved with both gifting and selling to your offspring.

Time is An Important Issue
Transferring the business to your family member will take longer than you think.  Start several years before you wish for the transfer to take place.   There are several reasons to give yourself plenty of time.  One important reason is that it could take a few years to come to the conclusion that a third party sale is a more attractive option for you than a family transfer.  This does not necessarily mean that your son or daughter would leave the business, or that he or she could not remain in a key position.  Although a third party sale can usually be accomplished in a shorter period of time than transferring to a family member, you want to be sure that you are selling in a strong market.  That means you need to give yourself plenty of time to assess the feasibility of a family transfer so that if you abandon the idea, you are able to offer the business for sale to a third party before the market weakens, insuring you an opportunity to receive maximum value in a reasonable amount of time.   

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 2015Joan M. Ridley

Exiting Right Takes Time

Joan M. Ridley, CEPA, CBI, CFP®

Independence, desire for control, image, and prestige – all these describe most business owners. Whether your business is a family affair or not, as a business owner you want to be in control.  But when it comes to taking charge of the future of the company in the event of your retirement, incapacitation, or death, like most business owners, you probably ignore or put off facing the realities for another day.

According to the State of Ownership Readiness done by the Exit Planning Institute in 2013,  53% of business owners “plan” to transition ownership to an external acquirer while 47% “plan” to transition ownership to employees or family.  And yet, 83% do not have a plan, or have not documented or communicated their plan.  Sadly, 47.7% of family owned businesses will fail to pass to the next generation due to inadequate estate planning, failure to properly prepare for transition to the next generation, and lack of liquidity to pay estate tax at the founder’s death (Univ. of Conn. Family Business Program).  That means that the business will need to be sold to pay estate tax and estate administration costs, or to invest the proceeds to support dependents, such as a spouse.  This is especially troubling if your children work in the business since they could find themselves out of a job if the business needs to be sold.

Many family-owned businesses will pass outside the family because the children lack the expertise, maturity, drive, or passion to successfully run the business.  Some children would rather sell the business and keep the cash.  This often happens even after the owner has done estate planning for the purpose of reducing estate tax due at his death.  Others will take advantage of competing opportunities such as marriage or career options that require their move to another area of the country.  If family succession is not an option, you would be wise to start planning now for another exit strategy.

The non-family-owned business owner will face similar issues and opportunities related to exiting from the business as the family-owned business owner.  Both might consider selling to employees or management.  If neither of these strategies will bring top dollar, and if that is a goal, then further planning needs to be done.

You might say that exiting for top dollar is not as important as insuring the happiness of your employees and customers.  That’s a very magnanimous statement, but consider what a ready, willing, and qualified buyer might be willing to pay might not be what you consider top dollar.  The market-place determines the value of a business, and, once you offer the business for sale, it might be too late to correct the issues that deter top offers.  

Could you even achieve your goals if you were to accept less than top dollar?  Before you answer, do some serious planning and conservative projections to determine what amount of invested capital you will need in order to accomplish your post-exit goals.  Remember to subtract out all sale-related expenses and taxes before beginning your calculations.   Don’t forget to factor in post-sale annual income tax and inflation.  Also take into consideration gifts to your favorite non-profits, gifts to family members, health care funding (yours or your loved ones) retirement funding, and funding for your next enterprise, such as establishing your own non-profit.  This all takes money so don’t be too hasty to say you don’t need to realize top dollar.

A well-planned exit could add value and maximize the cash you receive from the sale.  Even the most desirable companies require some sprucing up before inviting a buyer to look under the hood.  If you are considering an exit in one to three years, start preparing now.  If yours is a service-type business where transferring your relationship with your customers and venders will take one to three years after the transfer of ownership, add that to the equation.  For example, if you are 55 now and plan to work to age 60, and if yours is a service business, today would be a good time to start planning your exit.  

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

10 Steps to a Successful Business Transition

Joan M. Gruber Ridley, CEPA, CBI, CFP®

Suppose you were thinking about transitioning out of your business in the next few months, or even three years from now.   Would you know where or how to start the process?  Most business owners would say “no” or “I don’t know.”  As a result, businesses with between 50% and 80% of all privately held businesses that are in play, fail to sell or go to closing.  With a sound plan, your chances of a successful transition are greatly increased, regardless of whether you wish to transfer the business to family, employees, management, or to a third party.

Most business transitions fail due to any number of reasons including:

• unrealistic price and terms
• business-owner’s personal lack of preparation
• inappropriate exit strategy
• due diligence surprises
• the business’s lack of preparation
• inappropriate transition team
• inadequate post-transition planning
• poor timing

With proper planning, these issues can be addressed and the chances of a successful transition greatly increased.

Pre-Transition Phase

Start the process with a business check-up that examines all aspects of the enterprise.  The result is a clear picture of what issues need to be addressed to improve the value of the business.  These are addressed in the next step where value improvement is the goal.  This process includes the identification of current value before the improvement process begins.  On-going testing and various measurements to chart the increase in value demonstrate the results of the strategic plan that has been implemented.  At this point, personal financial planning is recommended to determine what your post-transition financial needs will be. Be sure to include your need for capital to make gifts to family and to the community.  It would make little sense to proceed with a transition strategy only to find out after the fact that the net proceeds after tax and fees are not enough to support the lifestyle you envision.  

If family succession is an option, this phase should also include a family business counselor who can offer invaluable insight into the likelihood that the proposed successor, management team, and employees can work well together to achieve the company’s goals while maintaining healthy, balanced family dynamics.  

At this point you are ready to examine all of your transition options.  There are at least three dozen.  While some will be eliminated early in the analysis, others will require detailed financial and tax calculations to determine which one is right for you.  This study also should take into consideration your personal needs, goals, resources, and values.  The final step of this phase is to identify the transition strategy you wish to implement.  This step includes a primer on the jargon, roles of the various players, types of buyers, deal structure, and other aspects of the process so that you are well-informed about what to expect.  

Transition Phase

Although there are only two major steps in this phase of the process, it could take as long as the entire first phase to complete.  Once you have identified and committed to the transition strategy you wish to pursue, the next step is to identify the team to implement it.  Look for advisors who are not only experienced and capable, but who are willing to work together for your benefit.

If you have chosen a family succession strategy, you might already have the team in place such as the estate planning attorney, your financial planner, and your CPA.  However, you might need to add a life insurance agent who specializes in sophisticated succession planning strategies, or other specialists to implement your plan if your current advisors do not have business transition as their area of expertise. Check with your existing advisors to be sure you are clear about their areas of expertise and to be certain that every team member is clear about his or her role in the process.  

If you have decided to transfer the company, or part of it, to your employees such as through an ESOP, then you will need an experienced team of advisors to carefully execute this complex process.  This process includes approximately 248 steps to complete.  It requires one professional who has completed many ESOPS to insure that all aspects have been perfectly executed.  If any step is overlooked or is improperly implemented, all of your tax benefits could be lost, and, you could be exposed to potential litigation down the road.

To implement a sale to an outside third party you will need to select a mergers and acquisitions (M&A) firm that will represent your company, identify a qualified purchaser(s), negotiate on your behalf, and close the deal.  Expect the M&A firm to have its own team, including transaction attorneys and CPAs to assist in the transaction, unless your own CPA and attorney have significant transaction experience.   Even if your existing advisors do not have significant experience with business transactions, there will still be an important role for them as your trusted advisors.

Post-Transition Phase

Once the transition is complete, there will be a period of time where some monitoring of the process is recommended.  If the business has been passed to another family member or to another generation, continue working with a family business counselor to insure that the lines of communication are open and that interaction between all involved is running smoothly.  He or she might establish a family council to accomplish this.  If the business is sold to an outside third party, a change-management team might be brought in to insure a smooth transition.   Intense work with your personal financial advisor usually begins in this phase, although it would be wise to keep that person involved throughout every phase of the transition.     

Is This Process Necessary

No, it is not.  You might say that you have suitors calling everyday who express interest in buying your business, so why go through this process and spend the money? Because anyone who is pursuing you has his own agenda.  What is good for the other party might not be in your best interest.  Certainly, the other party does not aim to serve you.  When you retain the services we are describing, your goals, needs, resources, and values are the focal point.   And, you get to decide what strategy to pursue.  You also get to decide exactly when you and your business are ready to allow outside parties to examine your books and your operation. In addition, when one party pursues you, you are in the unattractive position of negotiating with one suitor at a time where the purchaser has no competition.  This puts you at a serious disadvantage if you have a desirable company.  

Whether you are selling to an outside third party or are transferring the business to family members or to employees, observing this process is still recommended.  The purpose of the process is to improve value and to integrate the affairs of the business with your own personal needs.  This process will accomplish that.   

You might find yourself in the unfortunate situation where you do not have the luxury of time to go through this process.  Perhaps the market is changing very rapidly so that an opportunity will be lost if you do not begin to transition the business now.  Or maybe you, as founder of the company, have become incapacitated or are facing an imminent demise and the company is in danger of losing value.  Or, perhaps you are burned out and need to transition out of the business quickly.  These could be sound reasons to omit the pre-transition phase.  However, you are likely to realize less after-tax proceeds.   The downside is that you or your family might not be as prepared psychologically or financially for the post-transition phase. And, your stress level might be elevated because you have not planned as carefully as you could have.  But, if you have 12 to 30 months to go through this process, you will be in control, and your chances of being totally pleased with the end result will be greatly increased.

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

Boomers Have Business Transition at Top of Mind

Joan M. Ridley, CEPA, CBI, CFP®

The Boomer generation has been one of the most entrepreneurial in the history of our country.  During the last 30 years, over 5 million businesses with annual revenues ranging from $1 million to $75 million were founded.  The owners of most of these businesses are Boomers who are now between ages 51 and 69. They are beginning to think about what comes next.  Recent studies sponsored by, or conducted by,  PriceWaterhouseCoopers, MassMutual, Rutgers, Marquette University, University of Dallas and the Exit Planning Institute showed that between 34%, 55% and as high as 80% (depending upon the study), of privately held companies will change hands between 2006 and 2016.  Although the Great Recession caused many business owners to push their departure to a later date, the fact remains that 64% of all privately held businesses in the US are owned by Baby Boomers who are thinking about stepping aside, or leaving altogether.  Given the facts, we can expect a glut of available businesses and downward price pressure for most privately owned companies.  True, there are plenty of buyers laden with cash looking to acquire businesses today, but they are now more discriminating than ever.  That trend will continue as more Boomers decide to put their businesses in play.

How Boomers Plan to Transition

According to the American Family Business Survey, sponsored by MassMutual, approximately 30% of these owners plan to sell their business to a third-party buyer.  Another 30% plan to sell to a family member, while another 18% plan to sell in some manner to current employees. The remainder plan to close and liquidate the business.  However, the percentage of those hoping for a third party sale might actually be much higher than the studies indicate.  Many who plan to transition the business to another family member will find this strategy not feasible for a number of reasons.  Perhaps the would-be successor lacks the desire, expertise, or, does not meet the requirements to run the family business.  Those who had planned to sell to a third party a few years ago but had to delay their transition when the Great Recession hit are now thinking about moving forward.  Now that the economy and their businesses have recovered, these owners are ready to enter the market, adding to the number of opportunities for potential acquirers.  Notice I said that “the owners” are ready. The question is, how ready are their businesses?   

The Cost of Not Planning
 
Tragically, according to the PriceWaterhouseCoopers study, approximately 75% of private business owners have no written strategic transition plan in place.  An additional 25% have done little or no estate planning.  According to the 2013 study done by the Exit Planning Institute, an astonishing 83% do not have a plan, or, have not documented or communicated their plan with their family, advisors, or key people. This is a recipe for disaster.  These ingredients are essential to preserve or maximize wealth, to minimize tax, and to insure that the business owner’s vision becomes a reality during his or her lifetime, or, posthumously.  Anyone who is serious about transitioning needs to be well-prepared in order to compete for the most desirable acquirers, or to preserve the family business for future generations.   For those business owners who intend to sell to a third-party, it will become exceedingly important that they position their business to transition successfully in an increasingly competitive market.  With up to 55% or more out of every two business owners looking to transition over the next 15 years, there will be a glut of businesses on the market.  Now, more than ever, it is important that every business owner focus on doing everything he or she can to increase the attractiveness, value, and salability of his businesses.

Chaos or Peace of Mind and Wealth Preservation through Transition Planning

A transition plan is a comprehensive, integrated plan that asks and answers all of the personal, business, legal, financial, tax and estate planning issues that are involved in transitioning out of a privately held business.  This plan shows business owners how to begin positioning themselves and their businesses so that the owners accomplish all of their personal, financial and business lifetime goals.  Planning for both the business owner and the business are key to a successful business transition, whether they plan to transfer the business to family, employees, a charitable trust, or to a third party.

When preparing the business, business owners will need to focus on improving profitability, building a management team, growing revenue, and a host of other critical issues in order to make their companies more attractive and to maximize the after-tax proceeds they receive at the time of transition.  When preparing the business owner, taking steps to address personal financial issues and the emotional side of leaving the business merit special attention and preparation to insure a successful transition.

Good Reasons to Begin Transition Planning Now

• There are more buyers in the market than sellers
• There is plenty of liquidity in the market to finance transactions
• Interest rates are low which makes borrowing attractive for buyers
• The economy is currently expanding and we are in a strong economic cycle which creates a good environment in which to sell.
• It takes approximately 2 years of focused activity to get your business ready to sell at a reasonable or maximum value.

The Pay-Off for Those Who Prepare

Transition planning delivers tangible results for savvy business owners.  It is not uncommon for companies that have invested the time and effort to prepare themselves for sale to sell for a significant premium over companies that come to market unprepared.  In addition, with good planning, business owners are often able to reduce, or in some cases, defer or totally eliminate the capital gains taxes due at the time of sale.  This dramatically increases the after-tax net proceeds that owners keep.  But the most often overlooked benefit of transition planning, and perhaps the most important, is the peace of mind that comes when a business owner knows that he or she is being proactive and taking charge of the future, rather than waiting passively to let the future take care of itself.  After all, deciding how and when to transition a privately owned business is perhaps the single most important financial and personal decision in a business owner’s lifetime.

How to Get Started
Start the ownership transition planning process by getting informed.  Seek information from the best independent and objective sources possible.  One good place to start is to talk with trusted advisors like your business consultant, attorney, accountant, financial advisor, or insurance professional who focuses on privately held businesses.

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