Think back … remember what you went through to start up or purchase your business? How many recessions, hiccups or heartaches have you, or those who came before you, endured to bring your business to this point? It is not easy to run a closely held or family-owned business. We see business owners pour their heart and soul into their businesses, take on significant risk by signing personal guarantees for the debt and focus the majority of their assets in their businesses. So, we must ask, why do so many fail to plan for the inevitable succession or sale of their business? Something is going to happen — remember the saying about death and taxes?
West Michigan is a hotbed for closely held and family-owned businesses, and they have helped create a vibrant community that continues to grow. In 2015, The Family Owned Business Institute (FOBI) published the results of its survey of West Michigan business owners and reported, “While 80 percent of the family businesses surveyed planned on handing down the businesses within the family, only 19 percent had a formal written succession plan in place. The lack of planning may be a part of the reason why family businesses have such a difficult time surviving successions. (Only 30 percent survive from the first to second generation transfer, 14 percent from the second to third and less than 5 percent from the third to fourth generation.)”
We can provide you a number of good technical ideas on how to accomplish the succession or sale in a tax-efficient manner. However, that doesn’t seem to be the issue that needs to be addressed. Our community of closely held and family-owned business leaders must become more intentional about the future of their businesses and families.
Let’s learn a lesson from the past couple decades. Although we saw clients preparing to transition or sell their businesses from 2009-11, the economic factors present at the time did not bode well for a successful transaction, a good price or qualified buyers with ample financing. Those owners who desired to transition, sell or retire could not do so how and when they had hoped. Many waited it out and, eventually, moved their business to its next phase many years later. Others became weary and closed or sold the business for less than they had hoped.
Many other business owners find themselves reacting to circumstances that may cause a dramatic change in their businesses. Brokers or buyers may approach owners with an interest to purchase their business. While it feels like a compliment and may be a great opportunity, it sends the owner into a reactive series of events to determine if this is the right buyer, right time to sell, right price and terms, and if it meets the goals of the owners. Unfortunate events such as accidents, cancer diagnosis and other severe illnesses also cause the owners and key management to face decisions in a reactive manner. I can think of many such stories about clients and families over the past 30-plus years, and you no doubt can recall some, as well.
So, how do you create a success story for your business and family? Here are a few thoughts on how to intentionally plan the sale or succession of your business.
Make sure the business is in good financial health for the transition or to maximize the price. How to do this is another topic for another day.
Prepare the management team and possible successors:
- Identify those who are, or could be, leaders.
- Create a culture where the leaders and employees can thrive and develop the needed skill sets for the next phase.
- Talk to your leaders. Are they interested? Some people are truly afraid of such a role and may not want to be your successor. It is better to learn that now.
- Provide them leadership training and mentorship.
- Keep talking with them and provide additional opportunities.
- Recognize that the business cannot rely on you in the future. The more the business relies on your management team, rather than the owner, the more valuable it should be to others.
Determine the answer to a key question: Should you turn over the business to a family member, key employee(s) or an outsider? To answer this one, business owners need to consider a number of things.
- What is in the family’s best interest? Make sure you discuss this with your family members.
- What is in the best interest of the business? What does it need to be successful in the coming years?
- Do you have key employees with expectations that should be respected?
- Are you financially set for the future? Or does the price you receive have a significant impact on your retirement?
- What would a sale to a strategic buyer do for or to your business and family?
- Higher sales price for the current owners?
- Bring new leadership and skills to the business?
- Bring new investments?
- Change the culture?
- Move the business out of the area?
- Eliminate a number of jobs to provide the desired ROI to the new owner?
If you are planning to sell to family members(s) or current employees, develop a structure for the transaction that is fair and achievable — as well as tax efficient. Often, such plans should be developed and put in place many years prior to turning over control and/or ownership.
What are the first steps? Put some thought into these key issues. Discuss them with your family and business partners. Lean on your advisors to be the outside, objective members of your team who can guide you in developing the plan and going through the process. This may be the largest business transaction of your lifetime. Your advisors do this for a living.
When you stop to appreciate the painstaking process you or those before you went through to build your business, you may gain a greater realization of the significance of this vital step. Planning for the next phase is important not only for your business but for your family and your future. Be intentional and take the first step.
Peggy Murphy, CPA, CGMA, is a shareholder of Hungerford Nichols CPAs + Advisors.