Exiting your privately owned business can be a very emotional, intimidating and taxing proposition.
This complex process requires input from your accountant, tax adviser, attorney, business appraiser, estate planner and financial or insurance adviser, among others. Coordinating and understanding the disjointed advice can be overwhelming. The job of exit planners is to design a customized blueprint for your exit, while coordinating all the moving parts associated with transferring the business.
Certified planners are specialists in this process. Their role is analogous to that of an architect. They understand and design every part of a building, but don’t necessarily have the capability to install a furnace. They design, specify and create a blueprint that coordinates the building process.
Exit planners work in a similar holistic fashion. They design the exit plan, creating a blueprint for the business owners and their advisers as a way to understand and coordinate the exit process in order to meet owners’ goals and reduce tax impacts. Exit planners do not write the legal documents, recommend investments or prepare estate-planning documents. They are designers and process consultants.
HVAC construction business owners intuitively understand and manage their everyday risks, but most owners have never exited a business and are unaware that the odds are against them. This two-part article will highlight several concerns when it comes to a business exit. There are seven recurring problems that can derail the plans from successfully achieving their inevitable exit. This article — part one of two — will cover the first three.
Outliving your money
Guess what the No. 1 fear is for affluent Americans? Surprisingly, it’s not public speaking or even death, which used to be the biggest fear.
Now for those over 55 the greatest fear is running out of money in retirement, according to a 2014 Merrill Edge Report from Bank of America.
Most business owners are considered affluent. Their business pays them generously, supports their lifestyle, travel, autos and entertainment. Industry studies show that their largest segment of wealth is trapped in their illiquid business. The challenge is how to live independently from the business, cash out without being clobbered by taxes, retire and not outlive their money.
Poor odds of selling to a consolidator or competitor
According to the U.S. Chamber of Commerce, less than 20 percent of the companies brought to market actually sell. According to research firm FMI, this figure is closer to 10 percent for construction companies.
Do not wait until a buyer approaches you for a one-on-one negotiation. Once it’s ready to sell, plan to market your business to secure several competitive bids, which may increase your odds for achieving the highest price and financial independence.
Find an experienced and proven mergers-and-acquisitions professional and get the company “sale ready” to receive the highest possible price.
Determine early what price you need and the after-tax net of the sale in order to maintain your lifestyle.
Get a certified valuation adviser to determine the actual “synergy value,” so you have a realistic understanding of your company’s justifiable value going into the negotiation.
Trouble selling to managers or family
Less than 30 percent of family businesses will transfer to the second generation, and only 10 percent will transfer to the third generation, according to Family Firm Institute.
Another way of saying this is that 70 percent of family businesses will not make it to the second generation, and 90 percent won’t survive to the third. So if you were the founder of your business, your grandchildren would have about a 3 percent chance of taking over the company.
The vast majority of private business sales in the lower- to mid- level markets will be an internal sale, transferring via an employee stock ownership plan, a management buyout or through gifting.
If the internal sale is structured properly, the after-tax results can often exceed an external sale.
Part two will discuss more pitfalls involved in selling your company.