Benjamin Franklin once said, “If you fail to plan, you are planning to fail.” Although this is true in many aspects of life, it’s of particular relevance when you’re contemplating the future of your business. If you’ve put your heart and soul into making your company profitable, think of succession planning as a way to protect what you’ve worked for while generating the cash flow you need to fund your retirement.
At Yolofsky Law, we assist clients in industries such as healthcare, entertainment, transportation, and telecommunications. We’re well-equipped to handle a variety of business succession issues—from choosing a successor and valuing your business to setting up an employee stock ownership plan, preparing for a management buyout, or even selling your business to someone entirely different. If you’re contemplating your next steps, we can help.
Choosing a Successor
Internally transferring your business refers to passing the company to someone who is already familiar with your day-to-day operations. This could include selling the business to a co-owner or partner, offering a key employee the opportunity to purchase the business, or choosing a member of your family to take over the company.
Externally transferring the business refers to transferring the company to a third-party who currently has no affiliation with your day-to-day operations. For example, you might choose to sell the business to a competitor. These are also known as mergers and acquisitions.
In both internal and external transfers, it’s imperative that you seek outside assistance for your business valuation. You’re simply too close to the daily operations of the company to be able to view the situation objectively.
Business valuation methods can be grouped into three general categories: asset-based approaches, earning value approaches, and market value approaches. Earning value approaches are most common, but a combination of valuation methods may be the fairest way to set the price for your business. Keep in mind that valuations are done for a certain point in time. If you’re ready to put your business on the market or engage in another type of liquidity event, you might need to get an updated valuation.
A buy-sell agreement is often referred to as a prenup for a business. Just as a prenup explains what happens if a couple gets divorced, a buy-sell agreement explains what happens to a co-owner’s interest in the company upon death, disability, disassociation, or divorce.
Drafting a buy-sell agreement before problems occur helps make sure that everyone involved in the business is on the same page when ownership of the business needs to be transferred. A buy-sell agreement typically requires that each co-owner carry life insurance to protect their portion of the business in the event of their death.
For any business with more than one person, a buy-sell is one of the most critical documents the business must have.
Employee Stock Ownership
An employee stock ownership plan (ESOP) gives workers an ownership interest in the company. The company sets up a trust fund and contributes new shares of its own stock or cash to buy existing shares of the business. Depending upon how the plan is structured, workers can buy stock directly, be given stock as a bonus, receive stock options, or obtain shares via a profit-sharing plan.
ESOPs are popular because they have significant tax advantages and align employee interests with those of shareholders. They also aid in succession planning because they provide a ready market for a departing owner’s share of the company.
A management buyout (MBO) involves the management team of a company purchasing the assets and operations of the business.
MBOs are a common exit strategy for business owners because they allow the operations of the business to continue running smoothly. Since the management team is already in place, they are intimately familiar with the daily operations of the business. MBOs are also considered good investment opportunities by hedge funds and large financiers because having an experienced management team in place reduces the risk associated with the transaction.
Mergers and Acquisitions
Mergers and acquisitions (M&A) involve one company purchasing or merging with another. This is often done for reasons such as increasing market share, diversifying risk, adding core competencies, or creating economies of scale.
A business succession plan relying on M&A must consider the direct costs, as well as indirect factors such as how this will affect the recruitment and retention of key staff members. Potential risks, such as exposure of confidential data or legal liability if operations are moved to an area unfamiliar to your company, must also be considered.
In addition to managing the financial aspects of your business succession plan, there may be specific operational issues to include as part of your succession planning process. For example, consider a general contractor who suddenly becomes disabled. If he’s unable to sign contracts to keep his construction company running, what happens next? Is there someone already in place who can step in to keep things running smoothly, or does a new person need to be trained to handle this task?
Ideally, a business succession plan covers your own exit strategy in addition to creating a contingency plan for the possibility of your death or disability. It ensures you’re prepared regardless of what the future holds.
Contact Yolofsky Law Today
As a former Marine officer, attorney A.J. Yolofsky applies the same discipline and attention embodied in the Marines to his work helping clients throughout Florida create business succession plans that best fit their unique needs. If you’re looking for a partner and advisor who can help you evaluate your options and protect the future of your business, contact our office today.