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Family Business Exits and Transfers Pitfalls to Avoid – Five (5) Additional Issues

In this series of newsletters on family business transitions, we address five (5) additional issues, which we call pitfalls, that should be considered when building a plan for your exit and the transfer of the business to family members.  Transferring a family business from one generation to the next is a delicate process.  Focusing on these five (5) additional areas should increase the success of your overall business transfer and provide you with a more successful exit. I. Trying to give everyone an equal share Where multiple children (or other related family members) are involved, it is often the case the parents want to treat the children equally.  While this is a nice idea in theory, dividing your business equally may not be in the best interest of your business. Remember that the management of a business and ownership of that same business are separate issues and should be considered and handled in their own, unique ways. For example, it may be more fair for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children. Many exiting owners try to focus on the notion of being ‘fair, but not equal’ amongst the children, knowing that trying to keep everything equal may actually prove to be more unfair in the end. II. Not adequately preparing the transfer for a potential audit  For preparing the transfer of ownership to the next generation,...

Family Business Exits and Transfers – Pitfalls to Avoid

Amongst the millions of privately-held businesses in the United States, a large percentage are ‘family’ businesses.  This means that there is more than one generation of a family working in the business.  As you, the exiting owner, begin to consider how you and the company will live without the business as it transitions to your children, there are a few key areas where you should focus your attention.  This newsletter lists five (5) of the pitfalls that you should avoid when planning your family business succession. It is helpful to begin with a few statistics illustrating how often family businesses are trapped within these pitfalls.  Namely, less than one-third of family-owned businesses survive the transition from the first generation of ownership to the second – and only 13 percent of family businesses remain in the family over 60 years. Why such challenging longevity statistics? It could be in part to the added challenges that come with running a family owned business or, quite possibly, the many hurdles that can come with succession of that business.  Given the importance of the business to the families involved – including your family members, the employees, the management team and your community, it is worthwhile to review this list of pitfalls and incorporate these ideas and plans for greater success in your overall exit planning.  The five (5) pitfalls are as follows: I. Transferring when the parents are not financially ready Being a parent, you want the best for your children. Some business-owner parents who have children that are ready, willing and able to take over their business sometimes put their children’s needs above...

Four (4) ‘More’ Signs That You May be Ready to Plan for Your Business Transition, Part II

Successful business owners are unique in their abilities to manage many aspects of their companies, all towards a successful, profitable outcome.  In the day-to-day battles and pursuits to advance your company, it is unlikely that you stop to think about its future transition.  Despite the fact that you may not be ‘pro-actively’ thinking about the future ownership of your business and how you will participate in the transition of the company to the next owners, here are a few signs that may indicate that you are getting closer to planning for your future departure and succession to a new owner. 1)  I’d Like to Be Ready to Sell if the Opportunity Presents Itself If you are a successful business owner, then it is likely that others have approached you in the past about buying your business.  Alternatively, you may not have had the conversations with these buyers, but you know that they are out there and would cherish the opportunity to own what you have created and get access to the people and assets you have accumulated as well as the cash flow that you are churning each year.  If you are now thinking that those buyers will inevitably start knocking on your door and that you want to be prepared to have a meaningful conversation with them, then that is a sign that you should begin the exit planning process.  The bottom line is that there will be an excess number of Baby Boomer Business Owners looking for buyers for their businesses in the upcoming years.  Therefore, in most cases, the buyers and investors who acquire companies are going...

Four (4) Signs That You May be Ready to Plan for Your Business Transition, Part I

Successful business owners are unique in their abilities to manage many aspects of their companies, all towards a successful, profitable outcome.  In the day-to-day battles and pursuits to advance your company, it is unlikely that you stop to think about its future transition.  Despite the fact that you may not be ‘pro-actively’ thinking about the future ownership of your business and how you will participate in the transition of the company to the next owners, here are a few signs that may indicate that you are getting closer to planning for your future departure and succession to a new owner. 1)  My Company is Doing Well Again but I Don’t Want to Go Through Another Recession Business owners who have survived the last recession of 2008 should be applauded.  Tough decisions were made to stay in business as the financial and economic world around us seemed to collapse overnight.  Now that the worst seems more behind us than in front of us, you may be thinking about how much you almost lost and how risky your actual financial position really is.  To that end, you might be thinking about the fact that economies run in cycles and another recession will come, we just don’t know when.  And, if you’d rather not have the majority of your wealth tied to an illiquid business when that happens, so that you once again are forced to work very hard to protect what you have built, then that is likely a sign that you are ready to begin thinking about sharing or shifting those future risks with and to another owner of your...

Theoretical Dollars versus Actual Dollars in Your Exit

Millions of baby boomer owners are marching into retirement age with the majority of their net worth trapped in their illiquid businesses.  These owners need to turn their illiquid business into cash or find another way for that asset to continue to provide income to them if they are to reach their financial goals.  If you fit this description, then it is likely that one of the most important steps that you will take is to determine how and when you will be able to draw that cash out of the business.  Therefore, knowing the value of your business is a likely place to begin your ‘exit planning’ process.  And, while a professional appraiser has the ability to approximate the value of your business today, this newsletter is written to focus you on the critical differences between a valuation that represents ‘theoretical’ dollars in your exit versus a buyer who represents ‘actual’ dollars in your exit. Why the Valuation is Important In short, an alarming number of owners do not know the value of their enterprise.  Many owners overestimate what it is worth while a good number are also surprised on the upside to see that it holds a ‘value’ that exceeds their expectation.  The valuation that you receive for your business is a very important factor in your overall planning.  This number allows you to see the Value Gap, the amount between what you need to live on and what you have in business value (before fees and taxes) to see if you are ‘in the ballpark’ of affording to fund your exit. Theoretic versus Actual Dollars The value...

Financing Your Exit Transaction

Business owners who are looking to turn their illiquid business into cash will often ask, where will the money come from to fund my buyout?  This question applies to both internal transfers to managers, employees and family members as well as to external transfers to outside buyers.  The owner who is well informed as to the details of the pending exit transaction is well prepared to have meaningful and intelligent conversations about where the cash will come from to fund their exit.  After all, as the old saying goes, if you want the answer to a lot of your questions, ‘just follow the money’.  So, let’s take a look at the types of capital available and what type of buyer would attract, have and / or deploy that capital to buy your business in the future. General Comments Regarding Capital Flows It is important to know and remember that capital flows in and out of markets in a manner akin to how tides flow in and out.  At times capital is in abundance because lenders and other financing sources are optimistic and want to ‘put money on the street’.  At other times certain lenders retreat from the markets and withdraw from participating, even making ‘calls’ on the outstanding capital that they have extended.  The most recent recession was a classic example of financing sources retreating from markets during a time of turmoil and uncertainty, withdrawing or otherwise restricting credit facilities with owners and / or calling in their outstanding loans and / or withdrawing from financing buyouts all-together. Now, not all capital behaves in this manner, as this newsletter...

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