Pack Your Own Golden Parachute
Most small business owners eventually want to cash-out their investment and ride off into the proverbial sunset. However, this date seems far off and sneaks up on many entrepreneurs, often resulting in a “fire sale” situation or worse, “no sale.” Proper business planning can provide you with a “golden parachute” to carry you smoothly into retirement to replace those “golden handcuffs” that keep you chained to your investment longer than you wanted. A plan also provides for business stability in the event of unexpected illness or injury.
An experienced business lawyer like Attorney Shawn Eyestone will work with you, your business, and its other advisors to help develop a realistic and practical plan for transitioning you out of your business. A good plan addresses both voluntary retirement or involuntary disability or injury. If you depend on your business’s income or your business depends on you, then you owe it to yourself, your family, and your employees to have a plan in place to ensure a smooth transition, regardless of the reason for your departure from the business. Please click to call now or email us today to schedule a free initial consultation and summary analysis of your business plans.
Planning Is Not Just for the Sake of Planning
Successful business planning involves collaborative work with business attorneys and accountants where the parties put aside their preconceived notions of how things are going to be. Each advisor conducts a systematic analysis of the business and identifies areas to be addressed in the plan.
The planning process may never produce a perfect plan, and changed circumstances may ultimately result in walking away from the initial plan. However, the process itself is invaluable in setting reasonable expectations for both the buyer and seller by educating them of the true benefits and costs of the transaction. This understanding leads to better communication about the transition, which increases the the likelihood that the business will survive the departure of the founder.Most businesses fail to take these steps because it can and often does lead to uncomfortable conversations between generations or between employer and employee. However, doing so is necessary to address unreasonable expectations of either party. Lack of reasonable expectations often is the reason that as few as 35% of successful family businesses survive through the second generation, and of those only 20% survive through the third generation (that is a 7% success rate for transition from Grandfather to Grandchildren).
Analyzing the Business’s Ability to Meet Expectations
Each party should have his or her own team of advisors so that the business attorney or accountant does not have to split his or her loyalties and provide independent and uninhibited advice. The company’s regular accountant and business attorney will likely be employed on behalf of the selling party, but the buying party should be wary of relying on that advice alone, even if he or she is a family member or close friend of the selling party. Two sets of professional eyes are important to conduct a thorough analysis of the following:
- Business entity structure and ownership
- The financial needs of both the current owners and the potential future owners
- Whether the business assets and liabilities support bank or other third-party financing
- Whether the reasonable cash flow of the business will meet the needs of the buyer, the seller, and the financing obligations
Writing the Business Plan
After all parties have had a chance to work with the numbers, they can begin to evaluate the reasonableness of their original proposal and make some hard choices about what sort of compromises may need to be made either now or in the future. The ultimate deal has to make the transaction profitable for both the buyer and seller. If it is a bad deal for one party, it will typically be a bad deal for the other party, too, either financially or in terms of relationships or reputation.
Once the parties agree on terms and timing, the business attorneys will prepare a Buy-Sell Agreement, Shareholder’s Agreement, Purchase Option, or some other document that gives the buyer and seller rights to enforce the terms when the time for purchase and sale arrives. If that time is in the distant future, then much of the analysis that went into developing the plan should be regularly updated to make sure that the assumptions still hold true.
Free Initial Consultations
The first step to preparing for the inevitable departure of the business founder is taking that first step, so please click to schedule a free initial consultation and summary analysis of your business plans.