Many business owners assume that they get to decide when they will sell, but sometimes an event changes the landscape — a death, the onset of a terminal illness, or another major event can trigger the need for a sudden exit. When this occurs, the seller doesn’t have the luxury of maneuvering the company into the best possible position. The state of the entity and its assets at that moment, whether good, bad or complicated, is the best that can be leveraged. Perhaps an owner’s better tactic is to assume the need to sell may come at any unexpected moment. What steps would a seasoned exit planning strategist suggest?
Carl Pon, co-managing partner at Vicenti, Lloyd and Stutzman, recently celebrated a major milestone with the completion of his 35th year at Vicenti. Carl is also a managing director with Exit Transition Strategies, a Vicenti affiliate that helps business owners plan strategies to create and implement a successful transition out of ownership or management. Read on to hear some of Carl’s most valuable lessons.
Lesson 1: Sooner is better, but now is best
The thing I hear most often when I’m working with a client to develop an exit plan is, “Gee, I wish we had done this sooner.” When selling your business has become imminent, it is best to already know what your business is worth. Do you know exactly when you will want to sell your business? Most business owners do not. Exit planning may take 5 to 10 to 20 years to meet your end goals. So start now.
If you’re lucky, an eleventh hour appraisal will reveal that the value of your company is such that you can meet all of your financial goals if you sell. If you’re unlucky, you may have to stay on longer than you would like in order to implement strategies to grow the company. In other cases, you may need to scale back your goals.
The cunning owner starts early. When negotiations begin, the best position a seller can take is one in which he is able to walk away from the deal. This requires knowing approximately what your business is worth now and what you need it to be worth later.
Lesson 2: Conduct a due-diligence process on your business
A buyer with any sense will investigate the status of the seller’s contracts with customers, vendors and employees. Potential problems, like a lack of clarity in a hand-shake deal or a verbal agreement, can kill a deal or depress the price. Long before a sale is considered, examine your contracts. Clean house and make sure that agreements are clear. But seller, beware: taking a fresh look at contracts can make agreeing parties nervous, even skittish. They may ask if you are trying to sell the business before you are ready to share that information. Clarify the contracts when you have no pressing need or desire to sell. Your customers, vendors and employees will appreciate the peace of mind.
Lesson 3: Get it in writing
All those handshake deals and verbal agreements…you guessed it, get them in writing. When I come across a verbal contract, I sometimes ask each party to write their understanding of the agreement on paper. When I compare the two, they are not the same. This situation sets the stage for controversy, especially if you have to sell quickly, or if a beneficiary is selling on behalf of a decedent.
If nothing else, write a letter to the key decision maker who will follow you. Think of it as a business will. Make suggestions for steps to take before, during and after the sale. Draw attention to potential vultures that may make poor, but insistent buyers. Clarify your understanding of agreements with customers, vendors and employees. Explain your wishes for the company, and explain why you want the letter recipient to be in charge. This approach is not as solid as vetted contracts and a solid exit plan, but it is better than nothing and can be accomplished in haste if necessary.
Lesson 4: Multiple owners need a buy-sell agreement
A buy-sell agreement is only one part of a solid exit plan, but it’s an important one. When an entity is owned by more than one individual, a buy-sell agreement clarifies what happens in the event of one owner’s exit from management or ownership. If that event is a death or disability, the agreement would be triggered giving the other owner(s) the right or responsibility to buy the first owner’s portion. But a catastrophic event is not the only time a buy-sell agreement is useful. What happens when someone tires of the business? Or wants to retire early in Boca Raton? What if one of the owners simply wants to do something different? A buy-sell agreement should also plan for an owner’s desire to leave outside of a catastrophic triggering event.
If Carl’s advice strikes a chord, take the first step – call Carl now to make an appointment to discuss strategies for your exit from management or ownership. You can reach Carl at 626-857-7300 ext. 258, or firstname.lastname@example.org.