Volume 22, Number 5 August 2014
 
 


ECCLESIASTES MAY HAVE SAID IT BEST: “THERE IS A TIME FOR EVERYTHING.”
YOU OWE IT TO YOURSELF, AND YOUR FAMILY, TO PLAN CAREFULLY FOR THE
DAY WHEN YOU WALK OUT THE DOOR

BY WILLIAM F. KENDY

Whether you purchased a store, took over the reins from a family member, or started your business from scratch, one of the furthest things from your mind when you took control was how to exit. Still, all things come to an end, and there will come a time when you will want to—or haveto—get off the bus. Determining an exit strategy is no easy task. Many independent business owners want to keep the family heritage intact and pass the torch to a relative instead of selling it to an outsider. Regardless of what exit option you take, here are some things to consider.

START EARLY

Planning to exit your business should start the day you open the front door and hang that framed first dollar bill on the wall. The actual plans may change based on your personal and professional progression, but it is critical that you have a plan in place to ensure a smooth transition.

DETERMINE WHAT YOU WANT TO DO

When the time comes, do you want to leave immediately or hang around for a while? Do you want to work only a few days a week or just specific times of the year? If the business was largely built on your presence and your business is named after you (or yours), you may have to be stay in the store for a certain period of time to make the deal work. Accept the fact that you won’t have complete control and decision-making authority. You may have always been the captain of your ship, but once you sign on the dotted line of the buy-sell agreement you most likely will no longer be the master and commander.

DETERMINE WHEN YOU WANT TO GET OUT

If you have an epiphany about becoming a hunting guide and think you can get out of the business in six months—good luck. Can it happen? I’m sure it has, but a quick, unconsidered exit doesn’t make very good business sense. It is advised that owners start the exit process at least three to five years out to make sure the business is in an attractive and saleable shape, the books are up to date, it has a profitable track record, and an exit plan is in place.

SET UP A TEAM

Selling and passing along a business isn’t easy and encompasses many issues, ranging from tax planning and estate management to insurance and buy-out options. That’s the short list. There’s a lot more. Assemble a team that includes an accountant, a tax professional, a financial planner, a valuation expert, and a trusted confidant.

VALUE THE COMPANY

Company valuations are “snapshots in time” of the financial holdings and worth of a business. Not only is a valuation important in establishing the worth of the company (obviously affecting its selling price), the process also identifies loans, debts, and liens. It also makes cleaning up the financials easier and establishes a figure to be used for tax and inheritance planning.

Because business owners have invested a major portion of their life in their company, they have a tendency to over-value their business. Don’t be discouraged if an independent set of eyeballs attaches a value below your expectations.

“We’ve done two valuations of our stores,” says Jeff Poet, president of Jay’s Sporting Goods in Clare and Gaylord, Michigan. “The first time we did it we spent a lot of money on a mergers-and-acquisition company, and we were floored at what it showed as the actual value of our business. It was a real eye opener, but we needed to know the bottom line.”
Who should you use to do a valuation? You could use an accountant, a commercial business broker, or a consultant.

“We use an investment-banking and corporate-financial-advisory firm for our valuations, because they have the experience to look at earnings, expectations, and the core of our business,” says Kevin Adams, vice president of Kittery Trading Post in Kittery, Maine. “We do a valuation every year to make sure that the stakeholders’ interest is in good shape.”

Valuing your business also can have additional ramifications, depending on how you want to structure the finances. If you identify a family member as your successor and bring them on board to work, you could craft a plan that allows that person to use the increase in business that is a result of their efforts as a down payment.

“The parent and the child value the business on the day that the child comes to work,” says small-business consultant and former retail store owner Tom Shay. “The business is revalued on the day that the parent wants out. They can do this themselves, according to the balance sheets and profit and loss statements. If they agreed at the beginning that the child would get 50 percent of the increase during that time period, then the difference goes toward a down payment. It is basically a self-funding down- payment plan.”

GET YOUR BOOKS IN ORDER

As a businessperson it is your obligation to take every legal tax deduction available. Having said that, you might have some extraneous expenses on your books that may not be attractive to a new owner. Keeping Aunt Matilda on the payroll may keep the clan happy, but if she isn’t pulling her weight and making a business contribution, it might be time to retire her. That’s good for your bottom line, although you may take some flak from the family. The decision, however, is ultimately best for the business and worth the grief, because the greater its profit, the more attractive your business becomes.

“Run your business as a cash business so you know your real status all the time,” says Miles Hall, president of H & H Gun Range in Oklahoma City, Oklahoma. “Know what money you have left over at any period, and stay on top of return on investment. It’s important that business owners keep in mind that their impression of their financial and business pyramid as an owner is different from the prospective buyer’s viewpoint.”
It’s also critical that you keep your acquisitions and dispositions book up to speed, regardless of whether you are moving on or staying put. It has to go back 20 years and cover everything that spends the night, even in the gun-smithing and repair area.

“We have records from more than 40 years ago and still get traces on some of those guns,” says Poet. “We transitioned so that some of our documentation is in hard copy and some of it is electronic.”

Passing The Torch 2

FINDING A SUCCESSOR

You may have children or other relatives that have the desire and passion to run the business, but don’t have the talent or skill set to get the job done. There also may be relatives who have all the required skills but do not have an interest or passion for the operation.

George Romanoff is the owner of Ace Sporting Goods in Washington, Pennsylvania. He purchased the business from his father and uncle and then bought out his brother. In addition to capability, he believes that the person running the operation has to have a true devotion to making the business a greater success.

“One of the biggest considerations in determining a family successor is to make sure that person has a true commitment to the business,” he says. “That commitment has to be not only to run the business but to be willing to do all the legwork and put in the numerous hours it takes to grow the company.”

What if two children have equal talent, skills, vision, and commitment?

“If the business is going to be turned over to two family members, everything has to be decided in advance, put in writing, and included in the buy-sell agreement,” says Shay. “You need to make a decision as to who will be in charge of what, how decisions will be made, and how disagreements will be settled.”
Without such a plan in place, the co-owner who always votes “no” wins.
What if no family members are qualified? In this case, you could take the “trash and travel” option, by selling the store’s inventory and assets, cleaning up all obligations, and then heading to parts unknown with the remainder (kissing away all your brand equity, reputation, and goodwill). You also could package and market the business to an outside purchaser, or put top management in place and still maintain control of the business.

It really boils down to this: Are you bound and determined to have a family member run your business no matter what results? Or are you willing to put someone else in charge in order to continue your family business tradition and legacy?

TRAIN YOUR SUCCESSOR

However you decide to divide up the business, don’t expect a family member with no business experience whatsoever to be able to run the shop successfully. You need to train your successor.

“I know of a fifth-generation jewelry retailer who mandates that all family members who want to work in the business start out at the lowest levels, doing tasks like taking out the trash and filling water pitchers,” says Hall. “They have to graduate from college and get a job outside of the company. Then they are allowed to come into the business, but only on a lower level. The biggest thing that owners need to ingrain in their replacements is to get them to get into the ‘why’ mode. While it is important to understand what they have to do, if they are going to lead and direct the business they need to know why they are doing what they are doing.”

ALL IN THE FAMILY

Keeping the business in the family and maintaining good family relationships can be dicey. You want to make sure that you are financially fair to your children or relatives who aren’t really interested in being part of the business, but who expect some sort of payout anyway. You can handle that by providing life insurance for people who won’t benefit from the business, “gifting” relatives or, if you are incorporated, awarding non-voting stock shares to non-participating family members.

Whatever you ultimately decide to do, decide to do something. Life has a way of getting “in the way,” and the world is full of examples of people who waited too long to start the process of passing the torch, with tragic consequences for all involved. Don’t be that guy.