Finishing a best-year-ever 2018 and being questioned daily by his second wife Anna Nicole about making her children officers and owners of the family business Buxboro State Bank, Big Daddy Ernest Bux concludes, at 65 years old, that it’s time to think about a family business succession plan. What should Big Daddy do? Is he likely to succeed? Continue Reading How can a Family Business Succession Plan be Successful?
After several months of telling family and friends that his wedding venue business on Big Bux Ranch was for sale, Jeff Bux is contacted by his biggest competitor Hustler Plentee who also owns a wedding venue in the next town south of Buxboro. Hustler asks if Jeff will tote-the-note because his credit is maxed out at Buxboro State Bank, which is owned by Ernest “Big Daddy” Bux. Wanting to avoid a broker’s fee and an attorney’s time, and hoping that he might be able to get a job at the Bank, Jeff – uncharacteristically – asks his father for advice to help him sell it himself. Can Jeff sell his own business? If you were Big Daddy what would you say? Continue Reading Should an Owner Finance the Buyer of Their Business?
This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.
Avoid Losing the Sale
Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business. Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.
Potentially Avoiding Litigation
When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense. One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.
Boosting Your Business’s Market Value
Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth. You should also consider having the business appraised.
Other Important Records
If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing. Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.
If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.
You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.
Tilting the Scales in Your Favor
Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.
Among the growing number of business owners looking to sell their business, JR and Sue Ellen Pawlenty are in the market to sell their company Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls and So You Might Sell Your Business Someday: Do You Need a Broker? For multiple reasons, such as family, health, age or interest, you have decided to sell your business. Now what do you do?
4 Tips – No Matter the Buyer
- Get your House in Order – all of your records, especially financial records should be reviewed by a competent accountant and be consistent with GAAP accounting methods.
- Assemble your Asset Financial Information for Buyer Due Diligence – contracts with buyers, employee policies and contracts, and overall business structure for legal and tax implications.
- Business Valuation – get an early idea from a competent valuation adviser and ask your expert for ideas to improve valuation, including identifying and perhaps courting your current competition. Careful: it may not be worth what you think, know what you need to retire.
- Plan – identify specific shareholder objectives and a transition plan. If your primary plan is a family transition plan, WAIT, there’s much more!
9 Specific Tips for Succession Planning of a Family Business
Family businesses account for a staggering 50 percent of the gross domestic product of the U.S., and it is not just in small storefronts or website businesses: 35 percent of Fortune 500 companies are private or public companies that are controlled by families. Key issues for succession planning include:
- Generational Transition – only a third of all family businesses successfully make the transition to the second generation.
- Alignment of Family Interests – alignment becomes more problematic as members retire and turn over the reins to the new generation and expect retirement income from the company.
- Balancing Financial Returns – buyout agreements are challenging when retiring family members look to the balance sheet value rather than an earnings capitalization model.
- Interfamily disputes. Family member interests may not be aligned, becoming even more difficult upon a family owner’s divorce or death and the surviving spouse holds stock (and voting rights) but is not actively contributing to the business.
- Estate and Inheritance Issues. Taxes and probate upon a family owner’s death can complicate business continuation.
- Identify and Groom the Successor. Identify a competent successor then develop them to assume the headship of the business by on-the-job training, working under mentors and advisors, and delegating before the actual passing on of the baton.
- Document the Succession Plan. A concrete, straight forward and not open to interpretation at a succession plan should be written: identifying the successors both in ownership and management; roles of both active and non-active family members in the business; and the support system for the successor from family members as well as the company.
- Create a Plan for the Transition. Establish how the business will be handed over – will the successor purchase the company, or will it be gifted? And when? If sold, what purchasing options will the older generation offer the successor? Minimizing taxes to all is critical.
- Communicate. The Plan must be timely communicated to the family and those active within the business, as well as non-active members, preferably by the current ownership. Every family member and employee must fully understand how the succession will work, and what their part is within it all.
Tilting the Scales in Your Favor
You can’t sell your business like you sell your car. It’s more like selling your house, but even more challenging than just timing the market, de-cluttering the inside and slapping a coat of paint on the outside. Beyond just the physical assets and the economic climate, you are dealing with people – employees, customers and vendors. Even more complicated is the addition of continuing family ownership, management and control to the mix. It takes time, planning, decision making and then decisive communications to all concerned for success. Success won’t happen overnight; failure almost certainly will happen if you don’t.