Last month we looked at the first two personal motives that can influence your timing on selling your business—taking “chips off the table” and losing the “fire in your belly.” Let’s look at the next two scenarios that can influence your decision to cash out of your business and move on to the next stage of your life.
The Successor Selected Doesn’t Work Out
A successor or successors are anointed from within the business (a key employee or usually two) or from within the family (a child or two). If no one has:
o stepped forward;
o the talent to take the business to the next level;
o demonstrated sufficient commitment to the business (at least equal to what yours had been); or
o the money now or through future cash flows from the business adequate to buy the business; then the business has become too valuable or too complex to transfer to anyone other than an outsider.
Let’s look at how one fictional business owner tried (and failed) to lure his desired successor into ownership.
It was the most unexpected outcome imaginable. John owned a disaster recovery service that had prospered for the last 20 years. As a careful, conservative businessman of the “old school,” John had amassed a significant fortune outside of the business—a business that earned $1 million or more each year. One of John’s exit objectives was to reward the key employees who had helped build and sustain his successful company. After much soul searching, John decided to “give” the business to his key employees. They would pay him nothing out of their own pockets.
The technique John used to give the business away was to have the business contribute money to a separate fund for three years. At the end of that time period, John would receive the money as a down payment for the purchase of the company. The down payment would equal 50 percent of the purchase price.
The remaining 50 percent would be paid to John over the subsequent six years from the available cash flow of the company. If cash flow was insufficient, John was willing to accept a longer payout period, although if cash flow continued as expected, it would be more than adequate to pay John the remaining balance.
In short, John would pre-fund his own buyout with three years of revenues (money he would otherwise be entitled to) and would obligate key employees and the company to provide the remaining 50 percent of the payment solely from the future cash flows of the company. In essence, John was “giving” the company to his employees.
At the end of six years, without one penny coming from their own pockets, John’s employees would own a company producing at least $1 million of cash flow per year. Imagine John’s surprise when their unanimous response was, “Thank you very much, but we don’t want to own the company. There’s too much risk in this business.”
John’s exit advisor was not nearly as surprised as John because through experience the advisor had come to realize that many key employees—wonderful, valuable and contributing employees that they are—simply have little tolerance for the risk that is part and parcel of business ownership. In John’s case, the employees weren’t even willing to be given the company.
There’s More to Life Than Building and Running a Company
Many business owners reach a point where they realize that there are a lot of things that they want to do while they are young enough to enjoy them. These include active vacations, spending time with family and friends, service work and personal growth and development which they can’t get to because they are too busy running their business.
Many boomer owners are deciding to pursue a second life or second career full of possibility, activity and involvement. This crowd gravitates toward race car seats rather than rocking chairs. To be strapped into the driver seat, owners need financial, emotional and time freedoms.
If you find yourself falling into one of these categories, then the time may be now to create a plan for preparing your business for your eventual exit. Find an expert advisor that can help guide you through the process of reviewing all of the factors associated with exiting your business and creating a comprehensive exit plan that addresses all of your personal and business objectives.
Company Name: Shumaker, Loop & Kendrick, LLP
Website Address: http://www.slk-law.com
Article presented by Robert Norris, a Partner and co-chair of Shumaker, Loop & Kendrick, LLP’s Emerging and Middle-Market Practice Group. Norris is also a member of Business Enterprise Institute’s International Network of Exit Planning Professionals. 2015 Business Enterprise Institute, Inc. Reprinted with permission. Shumaker, Loop & Kendrick, LLP partners with owners of closely-held business to provide comprehensive legal services in all areas of business, tax, exit planning, succession planning, purchases and sales of businesses, estate planning, real estate, employment law, intellectual property and litigation. For more information, contact Robert Norris at 704-945-2926 or email@example.com or visit www.slk-law.com.