Planning, planning, planning. We all participate in some form of planning: what to do with our weekend, scheduling all the kids’ activities, forecasting next year’s business plans, and maybe even “someday” plans. But how many of us have actually considered or created a plan which addresses not only how and when we will exit our businesses, but also whether and how family members and/or related parties will be a part of that plan?
In our 24 years in the restaurant and franchise M&A space, we have witnessed numerous occasions in which a potential seller decides it’s time to sell his business, but has not adequately addressed such crucial items as timing, valuation, tax consequences, succession planning for family members, or the future of his management team. The result: a false start to the process, a disappointed seller when the “I didn’t think of that” realization sets in, and a transaction that never really gets off the ground.
It’s not difficult to envision how this happens: you hear that your friend just sold his business for some incredible EBITDA multiple, or that investors are beating down the door to get into your system, or that lenders are giving money away, no questions asked. Never mind that in most cases the information floating about is incomplete or incorrect. Maybe even an unsolicited offer comes in. Your thoughts turn to “I better get a piece of this action before the window closes”, and you’re off to the races. But this is a knee-jerk reaction, not a well-thought-out, proactive, thoroughly-planned process. Until you have “checked the boxes” of a comprehensive exit plan, you are not really a ready, willing, and able seller, and are not likely to experience a successful transaction.
First Things First
As mentioned, there are many important factors which must be considered and addressed up front when creating an exit and succession plan:
- What is the preferred timing of an exit?
- If the exit will involve a 3rd Party buyer, how will it be valued, marketed, and sold when the time comes?
- Are there family members (or related parties) active in the business who would like to carry on the legacy?
- If so, are they truly capable?
- Is the existing management team capable (and desirous) of continuing to run the business?
- Is there a need for additional professional management?
- Will this option produce sufficient liquidity and/or income to meet your expectations as a seller?
- What are the tax consequences, and how does that impact the ultimate structure of an exit?
Once there are clearly defined answers to these questions, you can proceed to define the specific mechanics of a succession plan.
Options to Consider
Sale to 3rd Party:
If your succession plan includes a transfer of your business to a 3rd
Party, you will need to address several important factors:
- Timing: Is it best to target a specific retirement age, sell at an opportunistic market time regardless of a targeted retirement age, or have my estate sell the business upon my death?
- Valuation: How can I determine the true market value of my business? What is the best resource available to assist with this critical part of the exercise?
- Buyers: What is the profile of an ideal buyer? What is the ideal resource available to me to tap into the pool of most qualified buyers?
- Marketing: How can the business be presented in the best light to the best buyer candidates? What resource is best suited to address and deliver on this approach?
Stock or Asset sale: Will you sell the stock or the assets of your company? Would you take stock as payment from the acquiring entity, or cash only? How will you ascertain the tax consequences of each?
Succession Planning -- Family:
If the opportunity allows and the decision is made to transfer business ownership to family, you will need to decide if ownership is sold or gifted (or some combination thereof), and whether that process takes place during your lifetime or upon you death. In any case, you will need to determine who will control the business, who will own the business, and who will manage the business.
If a transfer to family will involve gifting, there may be estate tax benefits. This can be complicated, so enlist the help of a qualified professional.
If a transfer to family is a sale, you will need to determine a fair value for the business, whether financing is required or available, and, if this takes place during your lifetime, whether the purchase price is paid up front or over time as an installment sale.
If you own your business with one or more partners, you also should have a plan in place with addresses the process to be followed in the event one of the partners experiences a life-changing event. A common way to address this is via a Buy-Sell Agreement between the owners, which should clearly detail the terms at which a partner’s share may be sold to the other partners in the event of death, disability, or retirement. Typically, a valuation formula used to value each partner’s share, so that there is no question as to valuation when a triggering event occurs. The Buy-Sell also helps prevent potentially sticky situations such as becoming business partners with a former partner’s spouse or family member, or perhaps a trustee. Finally, a Buy-Sell Agreement makes a market for a departing partner’s shares, which is critically important in terms of receiving value for his portion of the business, as there otherwise would be no real market for a minority-share interest in a privately-held business.
It is inevitable that a transition of ownership of your business will
occur at some point in the future. The optimal outcome will be achieved if you make a specific and solid exit plan up front, addressing the critical items outlined above. This way, when it’s time, you will be a ready, willing, and able seller.