The Business Divorce Law Report
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The Need to Exit Our Closely Held Business is Non-negotiable. We all leave, eventually.
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Exit and succession planning protects our business, our employees, and our families.
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The effects of most business disasters are avoidable.
“Hope is not a strategy.” Vince Lombardi
If you own a business, you know that ‘winging it’” is not much of a business plan; it’s a recipe for disaster. Exit and succession planning isn’t a luxury; it’s a necessity. It’s not about if you’ll exit your business, but how and when. Lombardi during his career went from assistant coach at St. Cecilia’s High School in Englewood, New Jersey, to leading the Green Packers to two Superbowl victories. Lombardi always had a plan. He wasn’t talking about guiding a closely held business, but the thinking fits. And here is why.
1. The Inescapable Reality: The Grim Reaper is Undefeated
Let’s start with the cold, hard truth of mortality. No matter how invincible we feel today, there will come a time when we will no longer lead our business. We know that to be the truth. We are all leaving the job. Planning helps us avoid the potential that we leave feet first.
In much the same way, we know that we need the income from our business to support our lifestyle and the people that matter to us. Yet, if we are like most closely held business owners, we are all in on the company and the business is the largest single asset we own — in many cases, 75% of our net worth.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
We might envision a graceful retirement, maybe golden years on a beach somewhere. Or maybe from our status as entrepreneur emeritus, watching approvingly as the next generation carries on our legacy. It’s fuzzy and warm. But without a plan, the chances of that happening are like winning the lottery.
Without a well-defined exit plan, our business faces a chaotic and uncertain future. Our families and our employees, could be forced to make hasty, ill-informed decisions about the fate of the company.
In my 30 years of working with closely held companies, I have seen this happen over and over again. The successful entrepreneurs who built a thriving company from scratch, who poured their hearts and souls into the business, but did not have a working exit strategy. Many were older and at the end of their careers. Others were decades younger.
A few examples,. A successful owner of a consulting company still working in his 70s due to the lack of a buyer, a business owner with a health issue and young children considering a below-market sale today because the business isn’t ready to entertain the best buyers, the owner of a very lucrative distribution business simply closing the doors because he never put anyone in a position to take over his accounts, a successful business is decimated when key employees misappropriate the company’s customers and intellectual property.
These stories are legion. And they are in virtually every circumstance completely avoidable. Dealing with the consequences of not planning, meanwhile, can cost hundreds of thousands of collars.
2. Ineffective Planning Destroys Families
A poorly executed exit can do more than just damage your business; it can often tear families apart. Disagreements over the business’s future, unequal distributions of assets, and conflicts among those who work in the family business and those who don’t are real and often an inescapable consequence of poor planning.
In my legal practice, I have and continue to handle a lot of business divorce litigation involving closely held businesses. As the baby boom generation is moving on, they are leaving a legacy of intractable family disputes. My work today is generational. More often than not, the litigation I see involves disputes among the children of the founders, or between the old guard and the new guard of the business.
Ownership disputes, trust and estate lawsuits—these are the real consequences of poor planning. As are the ruined relationships between brothers and sisters who no longer speak to each other and use the courts to vent their disappointment with the lack of a plan or a plan that was never communicated to them. Again, I see it all the time and it’s avoidable.
Another real story: A family-owned manufacturing company in which two of the six children worked in the business and the other four did not. Did conflict exist while the parents were alive? Sure. But with their passing, the children took sides, as did their children; litigation followed and the family is by all appearances permanently broken. Resentment festered, trust eroded, and the once-close family was torn apart. The shop, once a symbol of their shared heritage, became a battleground and ultimately closed. Effective succession planning could have kept the business and the business and the family intact.
3. The Brutal Reality of the Market: 80% Failure Rate
Selling a business is not easy. The competition is fierce, and the odds are stacked against us. The Exit Planning Institute (EPI) has performed studies that show that upwards of 80% of businesses that go to market fail to find a buyer.
It is a buyer’s market. Remember the last real estate down market. If the property wasn’t in top condition, priced competitively, and marketed effectively, it languished unsold. And if the owner really needed to sell, the price had to be cut.
The same principle applies to selling a business, only more so. The buyer of a business is taking a big risk. The buyer wants to see everything documented. Solid financial records, intellectual property rights that are sown up. Loyal and effective management in place. Proof that the company has a sold customer base.
Still, many owners try to go to market without preparation. In most cases, there are no buyers for the business and certainly not at the asking price. Buyers are not interested in companies that are not well- documented and ready for a transfer of ownership.
Without careful preparation and a well-executed strategy, our chances of success are slim. So we labor on. Again, avoidable.
4. Taxes: The Silent Value Killer
Failing to plan for taxes can significantly diminish the value of our business to us and our family. The capital gains taxes built in a business after many years of building are significant, and without proper tax planning, we or our families may end with much less. We leave money on the table.
There are dozens of strategies that serve the public good, the welfare of our families and that boost the net of any succession plan These range from Employee Stock Ownership Plans to charitable giving and effective trust management.
I am smart enough to know that I am very uninformed when it comes to tax planning. We need someone to work with us and formulate a plan. And this is something that needs to happen well in advance.
Proactive tax planning strategies make a huge difference for many closely held business owners.
5. The Unexpected: Life Happens
Sometimes it is not our ‘exit’ that creates pandemonium; it is the unplanned for event in our business and it directly affects the lives of our employees and our families, as well as, in many cases, our customers. Life is unpredictable. Unexpected events—a sudden illness, a natural disaster, even a global pandemic—can disrupt even the most well-run businesses.
Picture the thriving tech startup that’s suddenly hit with a major cyberattack. The company’s data is compromised, and its reputation is tarnished. Think about the business in which the chief rainmaker is in a car accident and cannot call on clients for a year.
A real-life circumstance that I witnessed: The two owners of a successful business both die within nine months of each other. There is no succession plan in place and litigation among the children follows.
Then there is my own story: more than a decade ago, I had a major heart attack. I am fine now, but the recovery period was two years. Was I prepared? No. Was my business prepared? No. It wasn’t just me who suffered. Some of my employees found new jobs. Who could blame them? It was all I could do to assure that my existing clients were taken care of. My family suffered as the business revenue plummeted.
That experience, and the experiences of others that I see in my practice, is why I do this work.
The Bottom Line: Plan or Perish
Exit and succession planning isn’t just about preparing for the future. It’s about protecting yourself and your business today, protecting your family and acknowledging that life is shorter than we once thought and far more uncertain than we would like to believe. Feel free to contact me for more information.