You were the budding entrepreneur—a visionary– who had a great idea and started a business from scratch. Or maybe you were one of the lucky ones that inherited a thriving business operation from a relative. Or perhaps you ventured out and bought a struggling business and were able to steadily expand and nurture sustainability and steady profits year-by-year…regardless of which story is yours, you’ve worked hard at it to make it the success that it is today!
But now it’s time to think about taking it a little easier; handing the reigns over to someone else. If you`ve started thinking about it, you`re one of a small proportion of business owners that have done so early enough to be able to capitalize upon opportunities for putting a good retirement plan in place. In fact, many business owners have married their businesses—the sentiment “‘til death us do part” ringing forth in their hearts!
So…if you can wrap your mind around the fact that at some point you should slow down, what are your options, you ask, for having someone take over? Essentially, you have a few choices. You may wish to:
1. transfer ownership and control to a relative—perhaps your child(ren) or grandchild(ren);
2. transfer ownership to a key employee; or
3. sell it to a third party.
This list is not necessarily exhaustive. If you’re in the situation where none of your relatives or employees have expressed an interest in the business, what should you consider in terms of selling to a third party?
First, you should bear in mind that there may not even be a large pool of willing purchasers. Hindrances may be barriers to entry in the business; the market share held by your business may be minimal or the competition may be stiff. However, assuming there are some possible buyers, a key consideration is how best to maximize the value and marketability of the business. Hopefully, you were considering this issue over the years as you operated the business.
Preparing the Business for Sale
Many business owners have skeletons in the closet with respect to their business processes and/or white elephants in the room that a prospective buyer will spot upon examination of the records or the dynamics in action. For example, there may be employees who have low performance, often relatives; cash transactions which are not being reported for tax purposes; extravagant payments to spouses or children; inflated receivables, etc. The owner should be aware that most purchasers will ask for written representations and warranties, which could form the basis for a law suit by the purchaser should those representations and warranties prove to be untrue or misleading. Representations are statements of fact made to induce the purchaser to enter into the sale agreement. Warranties, on the other hand, are promises made by the seller that goods offered for sale have certain qualities or character or that the seller has good title to them to induce the purchaser to buy and which may be relied upon by the buyer.
If the buyer senses that there are skeletons or anticipates breaches of the representations or warranties, they may offer a lower price, hold back a portion of the purchase price to protect themselves in a waiting game to see how things pan out or cease negotiations altogether. Thus these issues should be considered as early in the succession planning process as possible toward resolving them before they critically impact the marketability of the business. Financial statements and reporting, tax planning, choosing between a share sale or an asset sale, litigation claims, environmental problems and employees are but a few of the many issues that should be considered when selling a business. We will briefly examine a few of them here.
An issue that muddies the waters of negotiation is litigation or other pending claims. These should not be ignored but instead seriously considered to resolve them as quickly as possible. Depending on the seriousness of the matter(s), unproven claims in pleadings and demand letters can cast a very dark shadow in a potential purchaser’s mind and even lead them to withdraw an offer and/or cancel negotiations.
Environmental studies should be conducted ahead of negotiations to focus the efforts of an environmental consultant and to obtain realistic figures as to the clean-up costs. In this regard, the owner should avoid giving environmental representations and warranties and indemnifications without knowing how contaminated the subject land is.
With respect to employees, purchasers may look for legal means to avoid claims of constructive dismissal by senior employees whose jobs are likely to change when the business is sold. They may also worry about how best to legally prevent a departing employee from taking part of the business with them. Unfortunately, it is difficult to put these things in place at the time of negotiations for a sale, as enforceable contractual solutions are normally put in place at the time of hire or when significant promotions or increases are given. Furthermore, presenting an employee with an agreement to prevent or limit competition may scare them enough such that they start looking for other work. This would be detrimental for the optics of the business, as you want it to appear to be strong, healthy and stable.
These issues are but a few examples of the reasons why owners who have even the smallest desire to retire should start succession planning years before their anticipated exit from the business.
To discuss your business succession planning needs and options, please contact Andrea Kelly.
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Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.