My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, March 14, 2016

What Small Business Owners Need to Know - One Day You Will Sell Your Business

Last summer, I attended a four-day course on family business succession planning, put on by The BDO SuccessCare Program. The course dealt with the usual financial issues accountants love to delve into when a business owner is undertaking succession planning, such as valuations and tax planning. But what I found fascinating was; that the meat of the course dealt with the many psychological issues and hurdles that an advisor must consider when dealing with family succession planning.

One of the slides utilized in the course, was a "One Day You Will Sell" flow-chart (see below). I was struck by the simplicity and frankness of this message. If you are a small business owner, the slide bluntly states, that if you do not plan for the succession of your business voluntarily, you unfortunately will likely have that decision made involuntarily for you. Jeff Noble, a Director & Practice Leader of SuccessCare notes that the involuntarily side of the chart can also include disagreement and disenchantment.

You Should Voluntarily Plan the Sale of Your Business

It is prudent for business owners to plan for a voluntary sale to someone inside the family or to a company insider, as this strategy also accommodates a change in direction to a third party sale. (If all preparation is geared towards an external sale, it is much more difficult to later switch to an internal sale.) This way the business decreases dependency on current management, leadership and ultimately current ownership. The by-product is a business that is also better prepared for and attractive to an external buyer.


Why Would Anyone not Plan for a Voluntary Sale?

When you review the left side of the above diagram and see the words death, ill health and bankruptcy, one would have to wonder why any small business owner would ever allow their "baby" to be subject to an involuntary disposition. It is not unusual where there is an involuntary disposition, that the ill business owner or their estate (if deceased) receive only cents on the dollar for the business.

Yet business owners do not plan for their succession in astoundingly huge numbers. In 2015, U.S. Trust undertook an extensive Wealth and Worth survey.

The survey reflected that an astonishing 61% of small business owners do not have a formal plan for the orderly succession of their business. Since in most cases, informal plans are not worth the piece of paper they are written on (although, most informal plans are verbal), these business owners are flirting with involuntary business dispositions.

The U.S. Trust survey noted five reasons business owners do not have formal succession plans. They include (with my comments in parentheses):

1. No plan to retire anytime soon (which means: they don't want to retire)

2. The decisions have yet to be made (which often means: they are procrastinating on deciding between long-time employees, their children or an arm's length sale)

3. Others are aware of their wishes (which means: there is no formal plan and a disaster is waiting)

4. A will is in place to cover the succession plan (which means: pretty much the same as #3 above)

5. They are too busy to think about it (which means: they don't want to think about it)

I would add the following other reasons:

6. They will not face their mortality (see my blog on facing your mortality)

7. They do not want to accept the fact that if they hand over the reins to someone else, the company may function without them (which means: they can't accept they are not the company)

In June of 2014, I wrote a three-part series on estate freezes. In the third installment, I noted Tom Deans, the author of Every Families Business  (the bestselling family business book of all-time) half-jokingly noted during a panel discussion we were part of that "when your parent has a heart attack at 71, twenty years ago they died. Now doctors put in a coronary stent and your parent is good for another 20 years. So when parents tell a child it will all be yours one day, that one day could be when you turn 65 and up until you obtain control of the company, your parent(s) may keep their thumb(s) on you (since they often maintain voting control as per my estate freeze discussion last week). Parents; skipping a generation is not succession planning!"

While the above quote is in reference to an estate freeze and passing the business to the next generation (Tom does not necessarily believe an estate freeze is the best succession plan), Tom's comments reflect that many business owners would rather just work till they drop.

If you are a business owner, review the seven reasons above, get over your obstacle and start planning for your business succession, or someone else may be planning your involuntary succession.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

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