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 that 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 their business--but has not adequately addressed such crucial items as timing, valuation, tax consequences, succession planning for family members, or the future of their 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 away money, no questions asked. Never mind that in most cases the information floating about is incomplete or incorrect. Or maybe 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 complete a successful transaction.
When creating an exit and succession plan many important factors must be considered and addressed up front:
2) 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 your 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.
3) Co-ownership transfers. If you own your business with one or more partners, you also should have a plan in place that 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 through a buy-sell agreement between the owners that clearly details 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 is used to value each partner's share, so that there is no question as to valuation when a triggering event occurs. The buy-sell agreement 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 creates a market for a departing partner's shares, which is critically important in terms of receiving value for their portion of the business, as there otherwise would be no real market for a minority-share interest in a privately held business.
In conclusion, 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. When it's time, you will be a ready, willing, and able seller.
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