Start With the End in Mind

You should work out a detailed exit plan for your small business when you open the doors … or even earlier.

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The road map for selling a small business can be tricky to follow. And reaching your next destination — whether it’s a new business venture or a fulfilling retirement — can either be a smooth or bumpy ride. The choice is yours, but one expert in small-business transitions says planning early can save headaches and heartaches for everyone involved.

Attorney Roy Jay Montney of the law firm Montney Isles in Traverse City, Michigan, works with men and women ready to move on after decades of building up their businesses. Montney spoke on the topic of selling small businesses at the 2018 Water & Wastewater Equipment, Treatment & Transport (WWETT) Show, and he elaborates on his advice for readers of Cleaner.

Planning ahead

If you have family members actively engaged and ready to take over your business, that’s probably the ideal situation. But countless business owners aren’t so conveniently positioned — and even those who are can ensure a trouble-free succession with some careful steps.

When’s the best time to think about how your business will end? When you start it. When it comes to selling, transferring, or closing a business, Montney says, “probably the biggest mistake most people make is not thinking about it until that point.”

Plan for the day you close your doors — or hand someone else the keys — starting the first day you open them, if not sooner. And whether your business partners are outsiders or family members, you need to recognize that sooner or later a change is inevitable.

Change could come for many reasons, some that you might never anticipate. You might plan for the eventual sale someday — but you could just as easily wind up with an unexpected event. A co-owner or spouse could face sudden disability, incapacity or death. A lawsuit, a major theft or embezzlement by someone on the inside could threaten the income or reputation of the business.

The simplest way to include all potential scenarios may be simply to ask yourself what you would want to happen if somebody leaves, whatever the cause, Montney says. “You need to plan how are you going to deal with it.”

The first step? “Simple communication. … Figure out how you want that transition to occur. Then talk about it.”

Business structure

That conversation can help you decide more thoughtfully how to structure a new business. For instance, a sole proprietorship can make the transfer of a business and its assets a lot more complicated, Montney observes, while structures such as a limited liability company, or LLC, trade the more complicated process of starting the business for a smoother transition when the time comes.

Two or more partners should decide upfront how the value of everyone’s stake will be determined. “It’s a lot easier to agree in the beginning on a structure than it is when there’s a disagreement,” he says.

And disagreements do arise, even among business founders who were once close friends or blood relatives. When people get older, their goals, desires, or even outlook on life could change, propelling them into new ventures sooner than anyone anticipated.

Formal contracts enable properly structured businesses to establish contingencies for such change. That doesn’t mean you’re locked in if circumstances justify changes — you can change contracts later by mutual agreement.

So revisit them frequently to make sure provisions still work for all. A wide range of events can happen over the life of the business: expansion to multiple locations; bringing on new key people, whether family members or outside hires, who might be potential successors; or acquisition of another business. “All of those are points of time in a business cycle that you want to look at and say, ‘Hey, does everything still say what we want it to say in the event of these occurrences?’” Montney says.

Be prepared

With the proper groundwork — and the good fortune of no unexpected potholes — you’ll eventually reach the time to make a transition to the next operators of the business, whether family members, key employees or an outside buyer. “Then you can get a good price and it happens without incident,” Montney says.

Of course, the best advice is always to be prepared. But let’s face it — plenty of us may come up short in the planning department. Montney says that’s the most common mistake he comes across. Suddenly, fate makes it clear it’s time to move on and we haven’t prepared. Partners fall out, someone dies unexpectedly, or some other disruption hits — and there’s no clearly defined path forward for the business. Then what?

“I tell most people the key is to understand what you’re looking for — what you want,” Montney says. “And be realistic. Is what you want reasonable based on your current situation?”

It’s far too common for feuding partners to lock horns and declare, in essence, “‘My business is worth a million dollars if you buy from me, but it’s only worth $500,000 if I’m buying from you,’” Montney says. “Until you get past that unrealistic expectation, you’re not going to get a resolution.” And worse, you’ll hurt your long-run return: “Take the emotion out of it. The emotion will probably cost you money.”

Professional help

The surest way to a resolution is to hire expert lawyers and tax advisors who can help everyone reach a workable agreement, Montney says. But you need the attorney’s advice even if there is no dispute and everyone agrees on all the terms, he stresses.

First, you want to make sure the deal is the best one possible under state, local, and federal tax rules and that it doesn’t leave any legitimate money on the table for any participants. Second, outside advisors will help you cover all the bases of a business transfer, such as making sure the new owner has all the licenses needed to start operating immediately or that the departing owner isn’t still on the hook for a personal guarantee made on assets such as a leased business vehicle.

A lawyer experienced in this area will also help you avoid ambiguity about who is really responsible when the business changes hands. “You want to make sure there’s some kind of finality to that transition.”

Finally it’s important that the business succession plan and every participant’s personal estate plan don’t clash. Suppose a partner dies or is disabled and his estate plan passes on a share of the business to the spouse or children. If the remaining partner doesn’t want that, “then we need to address that,” Montney says, before it happens. “You have to ask, ‘Have you thought about how is this transition going to occur? What is your intent?’”

With proper planning, complexities like those can be addressed in advance through a variety of mechanisms, such as special trusts, life insurance and the like.

So plan early if you can for the end of your business life, take a deep breath and put aside emotions if that end comes unexpectedly. And whatever your circumstances, don’t try to go it alone. Get the expertise you need.

That may be the best way to ensure that when the end comes, it helps you toward a bright new beginning.



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