NO WAY OUT

I frequently talk to my clients, particularly small business owners, about the need to have an estate plan.  Taking that theme one step further, business owners need to have an exit strategy.

I am currently working with a couple of clients on succession planning.  Many more businesses I represent need this planning, but have not even started.  As a private business owner, there are only three options for getting out of your business: (i) transfer it to an insider, (ii) transfer it to an outsider, or (iii) go out of business.   Unfortunately, many private businesses end up in the third category by default.

Transferring to an insider means passing the business to your family or selling the business to a key employee.  These transitions cannot happen overnight.   They take planning.   If a child or an insider is going to buy the business they have to be trained to run the business.   Plus, they need the financial wherewithal to pay fair value for the business.  If they are going to receive the business as a gift, how is the owner going to fund retirement?

Transferring to an outsider means creating a market to sell the business.   Who might be interested in buying the business?   Trade magazines are full of ads by business brokers trying to sell mom and pop businesses.  For to that to work, the business has to generate a price that both satisfies the owner’s needs and pays the broker.   Competitors might be interested in buying the business, but how do you find out without the word getting on the street you are looking to sell your business?   Regional or national firms might be interested in acquiring the business.   How do you tap into those markets?

Look to your team of professional advisors, particularly your CPA and your business attorney, to guide you along this path.  And you need to start long before you are actually ready to get out of the business.

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Everybody watches It’s a Wonderful Life over the holidays, right?  George is going to throw himself off the bridge when Clarence intercedes to show George what life would have been like without him.  While I hope none of you are contemplating doing yourself in, allow me play Clarence for a moment.

What would happen in your family, business or job if suddenly you were not there?  This might not mean death, it could be a traumatic brain injury or a stroke that leaves you in a coma.   Obviously, there would be grief and emotional distress.   So my question is—have you done the things you can do to help ease that distress?   Based on my experience, here are some things I suggest:

1. Make sure you have a will (or trust)—to ensure your assets are distributed the way you intend and that you pick the person in charge of that process;
2. Make sure all your beneficiary designations are up to date and correct—because assets such as life insurance and retirement accounts are not controlled by your will;
3. Make sure you have health care and financial powers of attorney—so there is someone who can legally step in and act for you without going to court;
4. Organize all your account information in one secure place (bank, investments, bills, credit cards, etc.) and make sure the necessary people know where these are—so that whoever has to take over for you has all the information they need in one place and organized;
5. Store online passwords in such a way that the person who steps in for you can get access to your online accounts—so much of what we do now is online, and if you do not have the user name and password, you can forget about getting access to those accounts.

While these tips are important for everyone, they are particularly important for business owners, because in the event of an emergency, it is critical the business keep running.

Do these things and maybe I will earn my wings!

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See the attached PowerPoint below on Negotiating Physician Contracts.

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Our law practice frequently involves buying and selling businesses.  Over the years, I have spent many hours reviewing contracts, financial statements and various other documents on behalf of buyers evaluating the purchase of a business.

Everyone knows you fix up a car or house before you put it on the market.  I have done this many times myself.  When I am done fixing up the car or the house I frequently I wish I had maintained the property in such good condition before I decided to sell.   It almost makes me not want to sell.

The same is true for businesses.  When my clients come to me with the desire to sell their business, we first examine what we need to clean up.  Are there contracts that need to be renewed or tightened up?   Are there key employees who should have noncompetition agreements?  Are all licenses and fees paid up?

That part of the cleanup is relatively simple.   The more difficult issues involve cleaning up financial statements, policies and procedures, and old bad habits.   For example, small business owners have a tendency to be very generous with their own expense accounts.  Typically the incentive in a small business is to show as little profit as possible while maintaining the highest standard of living for the owners.   However, potential buyers want to see a healthy bottom line to justify a price.

So the moral of the story is to run your business every day as if you are ready to sell it.  Do the hard work of planning and running your business properly now.   I promise you it will pay off in the end.

Ed

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