Broker Check

No one plans to fail, except those who fail to plan.

July 31, 2018
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Boy Scout motto: ‘Be Prepared’

   Owners planning to exit their businesses in the next decade, voluntarily or not, may be in for a rude awakening.  A successful transfer is the result of careful preparation.  “Plan for the Worst but pray for the Best.”

   Mark Dawson* started his Ag-Consulting firm after A&M, the Navy, and ten years with Monsanto’s Ag Division.  After 10 years he had eleven employees and was billing over $6,000,000.  Then the firm of two of his fraternity brothers joined.  By year 15 they covered most of the US mid and southwest, keeping in touch electronically (computers, text, skype, etc.).  Systems recorded all client data and communications.  Fees had passed $12,000,000 when the company plane Mark was piloting crashed in 2014. 

Two weeks after Mark’s death, Cathy, Marion and Jack, Mark’s family, were receiving his salary along with checks to buy the company and fund trusts for each of them.  Emotionally, their lives were wrecked; financially, they saw little change due to Mark’s foresight and diligence.  Mark was 52.

  Chad* Jackson’s father was a master carpenter who taught at Vo-Tech and built houses each Summer with Chad.  Instead of college, Chad spent 4 years in the Marines before starting Jackson Builders, Inc.  He did well.  After 30 years he had three companies: construction, paving, and a development partnership.

In 2011, at 55, a heart attack almost killed him.  His doctor gave him 5 years unless he retired.  After heated argument and another heart attack, he reluctantly agreed to sell his businesses. 

His plight was no secret.  Builders were not in great demand, especially dying ones.  Rather than disband, Chad offered the company to his three sharpest foremen in return for a balloon note (interest only for 8 years), a salary and, as needed, his guidance.  It amounted to only 60% of what he could have received had he been at the helm, but time was of the essence as his trusted crews were already finding work elsewhere.  Six months’ further delay might have limited a sale to used equipment.  The paving company was ignored by potential suiters; too many pavers were chasing too few jobs.  Chad was forced to auction the equipment for half its value.  The development business depended largely on Chad’s empire, so, but for one still-active development, it folded.

Obviously, Chad and his family suffered significant losses.  In retrospect, there are many things he could and should have done to prevent a 50% discount on all he had built.  At least he survived and was able to take the actions needed to salvage that small percentage.  He now lives comfortably in a retirement community where he watches his health and limits his spending. 

   In the next 8 years, approximately half of over 29 million small companies (500 employees or less) employing 57 million people will change ownership or disappear.  Called The Great Wealth Transfer by economists, it reflects the exit of the Baby Boomers. It prompts us to ask:  Will your business (or employer) survive?  Published studies* estimate that less than 30% of companies at risk have a succession plan in place and, of them, fewer than a half are viable and less than a third are funded. 

   Conclusion?  At least 12 million practices and companies, mostly private and closely-held, are in dire need of formal Exit Planning. That large a supply could make it a “Buyer’s Market.”

   An Ideal Exit Plan transfers a going concern to competent new owners for fair value. The seller’s desired result is often as much about income as it is about assets. The owner of a business or practice enjoys many perks (vehicles, vacations, reimbursements, expense accounts) often tax-free, above salary and pension.  A sale must also be funded so as to not handicap the successful continuing enterprise after turnover, usually involving a combination of debt and salary requiring the seller to remain in some helpful capacity for a specified period, often one or two years.  There are no fixed rules.  Each agreement is unique.

    Is your business or practice one of these?  The owners are about 60, have no obvious heirs working in the business and most of the company contacts are personal to the owners. The majority of operations and decisions are made by the owners and may or may not be traceable or systematically recorded.  In short, much of the business resides in the head of the owner(s).  Would this company likely collapse at the loss of the owner? There are other giveaways, but these are the main ones.

If the company you own/work for fits the above profile, ask the following questions: 

  • How long could the business survive at the loss of the/an owner? …the loss of one or two key employees?
  • Can/does the owner take long vacations away from the business without managing from afar?
  • Is there a natural successor/buyer of the business who could keep it growing successfully?
  • Would the owners’ families suffer financial hardship if the business was allowed to fail or shut down? Are most of the owner’s financial and personal interests tied to the practice/business?
  • In the event of a business reversal or the loss of key personnel, how long would it take to recover? How much capital would be needed to weather the storm?  Is there enough?
  • Is there any impediment to negotiating a future delayed buyout today based on an agreed formula and benchmarks subject to periodic review?
  • Is there a signed, funded agreement in place to transfer the practice/business at a specific date or event? If so, it simply needs periodic review and you are golden.

   If you can answer these questions, you know whether you have an adequate/inadequate/nonexistent plan.  If you can’t answer them, who can?. . .  Find that person and ask until you know the answers.  Your next step is to ask yourself, “What is the ideal Exit Plan Outcome for myself and my family as well as my employees…. When would I like that to happen?”   These two steps are half the process.  Write down your answer, in detail.  If you are an employee, alert your boss.

   Next, pick your Exit Plan Team .  Include your CPA, estate/business attorney, financial planner/Exit Planner and your business co-owners (who must also address those questions independently).  Later, you may want to include specialists in certain strategies or valuation.

   Do not expect the process to be quick or easy.  However, once in place, plans can be easily tweaked to reflect changing circumstances.  Time and money spent today can provide benefits worth 40, 50, even 100 times their effort in the future.  Further, with these concerns under control, having reduced a major source of stress, it is often easier to expand a business knowing growth and risk will be properly rewarded.

 

I will try to address Exit Plan strategies in more detail in a later article.  Meanwhile, questions or article ideas?   Please contact me.

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*: Not real names.  Studies – BMO  2016; EPI  2014; PWC  2015(?); Securian  2015; SBA  2016