SelfInformed

July 2011


Selling Out

Friday, July 01, 2011


Everything You Need To Know About Succession Planning For Micro-Businesses

By Don Sadler

Many micro-business owners have a hard time envisioning anyone else running their company. It’s your baby, after all, and you’ve built it from the ground up with your own blood, sweat and tears.

The reality, however, is that eventually there will come a day when you’ll transfer ownership and management to someone else.

Unfortunately, many small-business owners have given little if any thought to the idea of succession planning.

The difficult emotional issues involved and the potential complexity of the process can make it easy to shove succession planning to the back burner.

“Most owners haven’t given succession planning much thought beyond ‘I ought to do something,’” says David Geller, principal of Atlanta-based GV Financial Advisors, a financial planning firm that specializes in working with private and family business owners. “But it’s critical that owners think through what they want to happen to their companies when it’s time to hand over the reins.”

And that includes solo entrepreneurs or business owners with just a few employees. Here’s what you need to know.

Build Value Today

Your business represents your occupation and livelihood today, and probably your retirement income and financial security tomorrow as well. Therefore, failing to plan for business succession can threaten not only the ongoing viability of your company, but also your financial future after exiting the business.

This makes it critical to concentrate on building value in your business today while devising a plan to monetize this value in the future to meet your retirement or other post-business income objectives.

There are numerous ways to create more value in your business—or as the experts say, to create value drivers.

“Value drivers can reduce a buyer’s risk in purchasing your business and enhance the prospects that it will grow significantly in the future,” says Geller.

Jay Carter, managing director at Greer & Walker Corporate Finance, a Charlotte, N.C.-based exit planning and investment banking firm, identifies six key value drivers for most small businesses:

  1. Corporate records, legal documents and contracts: Do you have copies of all agreements the company has entered into, and are they current and in good standing?
  2. Financial statements and controls: Are solid controls in place and well documented? Are your financial statements readily available and accurate? You might consider having your financials audited or reviewed by a reputable accounting firm one to two years before exiting the business.
  3. Management team: Is a seasoned and experienced team of managers ready to assume your day-to-day responsibilities and help ensure a smooth transition to new ownership?
  4. Technology: Is your technology up to date and sufficient to meet the demands of your customers and your industry in general?
  5. Growth: Do you have a realistic growth plan for the business?
  6. Customer concentration: Is your customer base diversified? For example, does any single customer represent more than 10 percent of your revenue? Potential buyers will view heavy customer concentration as a risk that diminishes the value of your business.

Geller adds one more key value driver for most small businesses: the owner’s relationships with clients, vendors and other key partners.

 

“One of the keys to maximizing the value of a business is creating a structured plan for transitioning those relationships to the new owner and management team,” Geller explains.

 

Answer Key Questions

Carter lists three questions you should ask yourself as you begin thinking about your business succession plan.

  1. When do you think you’ll be ready to leave the business?

    You might plan on running your business until retirement—if so, how long do you want to keep working?

    “Either way,” says Carter, “give some thought now to when this might be, so you can start planning accordingly.”
  2. How much money will you need to realize from the sale of your business to meet retirement income needs?
  3. To whom might you want to sell your business? Your primary options include:
  • Internal buyer
    This may be employees via an employee stock ownership plan or a management team via management buyout. Or you might want to sell to your family members or heirs.

    Often, getting the most money possible isn’t the primary goal when selling to internal buyers. Rather, ensuring employment security for staff and family members and the continuation of your business legacy might be more important.

    In this case, you might be willing to accept less money and less favorable (perhaps even riskier) terms to make the sale happen.

    “Here, you need to determine the lowest value you can accept and defend for the business,” says Geller, “because this will impact the taxes you and the insiders pay and whether both sides can achieve their financial goals.”
  • External financial buyer
    This may be a private equity group or an individual. Private equity groups look for companies with strong growth potential that they can later sell for a large profit and return on their investment.

    “Individual buyers may also be interested in the future value, but tend to be more focused on recurring income,” Carter adds.
  • External strategic buyer
    These buyers often seek businesses whose products or services complement their own. Or, they may be looking to increase market share by acquiring your customer base.

    “Often, strategic buyers are willing to pay a higher price than financial buyers,” notes Carter.

    “When selling to external buyers, you’ll want to determine the highest possible value for the business,” says Geller, “so you can negotiate the highest possible price and the most favorable terms for yourself.”

Find The Right Advice

Carter says there are countless and complex issues involved in selling a business, which makes working closely with a team of experienced professionals critical.

 

“An experienced succession planning team helps you avoid what’s avoidable and deal with what isn’t,” he says.

Your team should include:
  • An experienced transaction attorney
  • A tax expert
  • A personal financial advisor
In addition, Carter recommends getting the expertise of a transaction advisor.

This individual “holds everything together and keeps the other parties moving in the right direction even when surprises crop up,” says Carter. “And there are always surprises.”

Structure The Sale

The structural issues of succession center around two key questions, Carter notes:

  1. Are you selling stock or assets?
  2. How will you get paid?
“For tax and liability reasons, sellers generally prefer a stock transaction, while buyers generally prefer an asset transaction,” Carter explains. “The buyer will ultimately determine the final transaction structure, but the impact on the seller must be considered when the purchase price is negotiated.”

Another major issue is how much of the purchase price will be paid in cash at closing and how the balance (if any) will be paid.

“Sellers should never count on getting all cash for their business at closing,” says Carter, “because buyers may require seller financing due to a lack of available credit from other sources. Buyers also gain comfort knowing that the seller has some ‘skin in the game’ after the transaction closes.”

You should also give some thought to your potential post-sale role in the business.

Carter says it’s not uncommon for buyers to expect the owner to stay onboard for a period of time after the sale to help ensure a smooth transition.

“Owners can do this as a paid employee, consultant or board member, and this arrangement can be negotiated as part of the sale terms.”


Don Sadler is a freelance writer who is starting to think about how he’ll transition from self-employed business owner to retirement.



The NASE Can Help

When selling to external buyers, you’ll want to determine the highest possible value for the business.
An experienced succession planning team helps you avoid what’s avoidable and deal with what isn’t.

When you’re ready to explore your retirement options—including the possible sale of your
micro-business—turn to the NASE experts.

NASE Members have unlimited access to the small-business advisors—at no additional charge.

You can Ask The Experts about:
  • Retirement planning
  • Estate planning for you and your heirs
  • Legal issues surrounding the sale of your business
  • Tax consequences of selling your business
  • Strategies for increasing the value of your business before a sale
  • Financial and accounting issues before, during and after the sale of your business
  • And much, much more
The experts include licensed attorneys, certified public accountants and professional business consultants.
Together they have years of firsthand experience in micro-business issues. They know the right questions you need to ask—and they have the answers.

Get the advice of the NASE experts today.

Read this article in PDF form here.

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