The typical family or closely held business has a life much like any of ours, beginning in infancy and growing with the passage of time and the occurrence of various “lifecycle” events.
Especially during the maturation state, the business owner begins to focus more closely on where the business should be going in the future and whether the owner will be going in the same direction. At this stage, every busines owner is faced with an almost daily question by which he or she is torn between two decision points—"Am I going to keep the business and pass it to the next generation?” or “Am I going to sell the business?”
Pertinent Considerations
The very complicated decision must include such considerations as: the owner’s desire to work or retire, family dynamics, income security for working members and shareholders, the current business environment as it relates to the pricing multiple for the specific business, what will and should happen to loyal executive and employee groups, the extent of the owner’s other assets and tax consequences. The decision to keep or sell is frequently made on a spontaneous basis, without appropriate consideration of the issues outlined above. Some business owners will entertain offers for their company just to see what the options are, but they fail to realize the potential ramifications of rejecting the offer. Planning and positioning prior to a decision to keep or sell ensures a more efficient, effective outcome.
There often is a lack of coordination of the shareholders’ personal needs and objectives with those of the business, and little coordination between the generations. In short, all successful business owners can and should make these important decisions based on a sound and thorough knowledge of the options available to them and the overall consequences of their decisions. While no decision may be perfect in all respects, careful and complete planning can meet most objectives.
To Keep Considerations
Value: Determining the appropriate value of the business affects every aspect of the keep decision, and drives planning for keeping the business. Whether the business will be transferred during the owner’s lifetime, at his or her death or at the death of the surviving spouse, active heirs and inactive heirs may have an interest in the valuation being different.
The surviving spouse’s interest in value could be based on trying to plan for the eventual payment of estate taxes, on maximizing the amount available for his or her benefit or on effecting a sale to other family members, either under an existing agreement or in order to convert the business interest to an asset with less risk and more stable income.
Active and inactive heirs may have competing interests in business valuation, especially if they don’t all share the business asset or if they are to be “equalized” out of other assets. Even if the heirs’ interests are the same, value affects their ability to pay taxes from other assets or from the company.
Valuation is both an art and a science. It should be approached with care and an understanding of the purposes for which it is to be used.
Transition to the next generation: As the business owner approaches retirement or the desire to slow down, or as children mature and are ready to pursue a career, he or she is faced with deciding who is going to be involved in the ownership of the business.
Decisions-makers: The business owner should run a mental fire drill to understand what would happen to the operation of the business if he or she were permanently absent tomorrow. Are the people running the day-to-day operations empowered to make important decisions? Will the decision-makers be required to report to a formal or informal board of directors?
Even if a good management team already is in place, does it have an incentive to remain when the next generation of family assumes ownership and control? All of these questions should be considered, planned for and implemented before an “emergency” need arises.
Owner’s benefits: Many business owners are not fully aware of the value and extent to which they are receiving benefits from the company other than just salary. Medical benefits, perquisites, pension, employment opportunities for family members, travel and memberships should be recognized in the owner’s decision to retain the business.
Employee compensation: There are many ways to compensate employees in addition to their paychecks. Each method can serve a different objective, both for the business owner and for the employee.
Estate plan: Just having the correct legal documents does not constitute a plan for business continuity, nor should a plan remain static. Changing circumstances and changing values require a plan periodic review of the estate plan.
To Sell Considerations
Value: The buyer determines the value of a business based on a number of factors, including strategic benefit and fit with other businesses, earning and cash flow or the management team. For the seller, gross value paid often will be the determinative factor in whether or not to sell. But consideration paid can take a number of forms and should be carefully structured and negotiated.
Net Value: The impact of taxes involved for both the buyer and the seller often are not fully understood. The extent, timing and payment of these taxes can be planned for, but not after the deal is made. Total purchase price should not be as important as the net to the seller and his or her family. The buyer can be convinced to deliver more to the seller if it is more tax efficient for him.
Pre-sale planning: A great deal of planning should take place in advance of any sale transaction. The more time that elapses between the implementation of a strategy and the sale transaction, the better potential to preserve wealth and structure a deal that is beneficial to all parties.
Transaction strategy: Before the business is put on the market, its financial status should be examined and stated in the best possible light. Balance sheets and income statements may need to be recast.
Implementation and positioning: Developing a negotiating team is critical. Defining the roles of the owner and others in the negotiations is an essential prerequisite to making the sale process move smoothly and to obtaining the best result for the owner. Expert, experienced advice is required to determine the type of offer process that will be most effective.
Post-sale planning: Coordinating the change in the makeup of the assets from stock in a closely held business to liquid assets requires an analysis of income and security needs and a reconsideration of the existing estate plan.
Net to owner: From the beginning of planning for a sale through completion of a sale through completion of the transaction and beyond, one needs to keep in mind the end result to the owner and his or her family. All prior considerations help to achieve the best result for all generations of the owner’s family.
Available Resources
If you are considering selling or have thought about selling your business, you have two resources available to you from IMARK.
The Beringer Group provides IMARK members with a complimentary valuation and explanation of options related to your specific keep/sell planning needs. Contact Brad Williams at bwilliams@theberingergroup.com for more information.
Another resource to consider is the IMARK First Program. “The IMARK First Program is designed to match members desiring to sell their businesses with fellow IMARK member companies that are in acquisition mode,” explains John Aykroyd, president of IMARK Plumbing. “Our group is made up of family businesses and most owners of independent distributors often feel that the best thing they can do for their employees and their customers is to sell their business to fellow independent distributors. IMARK senior management maintains strict confidence of all parties involved, making the introductions of members who wish to sell their business to those members who may be looking to purchase and expand.”
IMARK offers this service free of charge to all members of all verticals. The IMARK First Program benefits all IMARK members by maintaining and expanding the group’s purchasing volume with suppliers. For example, IMARK Electrical has assisted in acquisitions over the past seven years resulting in the group retaining close to $1 billion in purchasing power. Contact Ken Nagel at knagel@imarkgroup.com for additional information about the IMARK First program.