Knowing when it’s time to close, sell or transfer the business

January 16, 2017

Not having a solid plan in place could be disastrous

January 16/23, 2017: Volume 31, Number 16
By Leah Gross

Screen Shot 2017-01-16 at 11.14.03 AMExperienced consultants will tell you no business plan is complete without a well-thought-out exit strategy. This is particularly true when it comes to small- and medium-sized businesses such as floor covering retail stores. Sadly, succession planning is not an area where many businesses place their focus.

“Not everyone considers a business’ life is potentially infinite,” said Roman Basi, an attorney and CPA with the firm of Basi, Basi & Associates at The Center for Financial, Legal & Tax Planning. “As humans we know our lifespan is limited. Though it is not a pleasant thought, at any instant someone could become disabled, pass away or have other circumstances beyond their control that pull them away from their business. Whatever the situation, the loss of a key person or owner, suddenly or even over time, could drastically alter the course or condition of the business.”

Studies have shown more than two-thirds of business owners do not have a succession plan. The number increases for business owners over 50. “Many people choose to avoid or overlook an exit strategy because they think their children will take over their business and handle things after their death,” Basi explained. “People seem to think this is built into the system, but it’s simply not true.”

If you are a parent you are likely to have witnessed your children arguing over a treasured toy, control of the TV remote or riding in the front seat of your car. Maybe you’ve even seen kids destroy something in the process of fighting over it. Kids will be kids, right? Totally normal. Now imagine your children, employees or co-workers fighting over an asset you have spent years creating and may be worth millions of dollars.

This could be the future of the business you built from scratch if you do not have a succession plan in place. Without an exit strategy, the fate of your business has an excellent chance of being determined by a judge. It is the sort of dispute that can quickly turn a million-dollar asset into total dissolution.

“Since we cannot predict the future, it is important for the business owner to adopt a ‘what if’ mentality when thinking of exit plans,” Basi said. “Ask ‘What if’ or ‘What should I do if’ and then name or state a scenario. Examples: What should I do if my business rapidly expands in the next five years? What if the economy enters a depression? While the form or wording of the thought is not important, this kind of thinking will allow you, the business owner, to consider a wide range of contingencies and plan accordingly.”

Henry’s Floor Covering, Green Castle, Pa., developed an exit strategy 10 years ago. “We’re family owned and our long-term goal when we drafted our succession plan was to be completely debt-free and ready to retire at age 65,” said Greg Miller, the 61-year-old president of the company. “When the time comes to pass along the business we’ll be ready for it.”

For some retailers, having a good succession plan is akin to an insurance policy. “I may be in the minority in my belief that owning and operating a floor covering store is a good thing for my kids,” said David Elyachar, founder/owner, Big Bob’s Flooring, Yuma, Ariz. “Most people want something different but I can think of nothing better. I recruited my kids to work in the store beginning at age 5. They were working in the warehouse and on payroll by age 12. At 18 they worked the sales floor. When the time comes, we are well poised with a solid exit strategy.”

Jim Walters, president of Macco’s Flooring, Green Bay, Wis., is another retailer who thinks succession planning is just good business. “As one of four equal partner-owners in our business, we started planning and outlining our exit strategy years ago,” he explained. “Ensuring the individual employees in our enterprise were taken care of continues to be our top priority. Our intention is to leave our company better than when we showed up.”

Steve Lewis, president, Lewis Floor and Home, Northbrook, Ill., agrees that timely succession planning is essential. “Whether you plan to keep your company within the family or sell, without a plan it is impossible to know and maximize the value of your company. Plans can take years to complete, and proper preparation is critical.”

Anatomy of a good plan

Every exit plan should take into account different factors such as the industry, competition, the owner’s resources and goals and any other relevant intangibles, experts say. For instance, a good solid succession plan provides an ongoing boost to employee morale and engagement. “With a sound plan there are fewer unknowns for those who depend on the business’s continuity,” Basi explained. “When there is no succession plan in place, it can be a huge negative. When employees are forced to think, ‘When the boss dies, no Christmas that year,’ it is not positive. But when an employee knows there is continuity, the employee does not face the better-jump-ship-before-it-sinks dilemma.”

Another element to consider that is missing from most companies’ forward-looking strategies is a specific plan for continuity after an unexpected business interruption. “It’s rare to find a company with a plan in the event of a disaster,” Basi pointed out. “If a storm, earthquake or fire hits, they could be out of business. Maybe there will be nobody with check-signing authority or control over other critical protocols. All business owners should have a business continuation plan in addition to their exit strategy.”

Paul Johnson, president of Carpet One Floor and Home, Tulsa, Okla., is in agreement. “You can either choose to plan your life or let someone else tell you how things turned out. When do you plan for the next sunny day? How about when the sun is shining?”

Johnson began succession planning for his business about four years ago. “That’s when my son approached me about the future of the company. That day I mentally began thinking about the ‘what ifs.’ I had to get my head around the reality of this type of transition. I immediately started talking to CPAs, attorneys, bankers and others about how to go about the process.”

Even those owners who do have a succession plan in place, it’s important to revisit and re-evaluate those plans as necessary. “I would recommend re-reviewing your plan annually and whenever your key employees get promoted or transferred,” Basi said.

Bottom line: Being proactive with your business pays off. It is especially true when dealing with an exit strategy. Facing the issues now, experts say, will reduce the incidence of lost opportunity and the likelihood of encountering problems that may be difficult or impossible to solve when a departure or other crisis is happening.

Where does one look for ideas on getting started? Basi suggests business brokers as an excellent resource for identifying an expert to help with succession planning.

“If you want to sell, they can take care of you,” he said. “If you want a referral, they know attorneys and CPAs that they trust and have past experience with,” he explained.

For more information, visit taxplanningcom to read articles, blogs and advisories on the issue.”

 

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