We all think we are immortal and business owners seem to never think they will leave the business. I had a construction client pass away on the job. He was actually operating a piece of equipment when the time arrived. One of the sad parts beyond his families loss was there was no buy/sell agreement in place or contingency plan to fall back on. The contract he had was able to be assigned giving the family a small sum of money but nothing else occurred. All the goodwill and customers were left to the competition to fight over. Before this event the company was likely worth close to one million dollars using a multiple of EBIDA model. One could say not having a plan in place cost the family $900k. While he did not have an internal successor he could have formed an alliance or plan with a competitor or interested party to accomplish this. There is nothing that brings out the worst in people like money and splitting up the pie when clear instructions do not exist.
If a plan exists with clear instructions it takes a lot of chaos out of the equation. There are several ways to fund a buy/sell. Life insurance is one of the most popular funding methods. Earn outs are another method that allows the payout over time. In short you pay off the owner over several years out of the profits of the business. A business that has multiple owners should have extra incentive to accomplish this. Having the spouse of the departed owner is likely not the desire of the remaining owner. A buy/sell plan will normally provide a valuation formula to allow the owners to determine the value of the business. Without this the owners will face conflict from all sides which takes time away from running the business. Another option to transition a business is to sell to the employees thru a model called ESOP (employee stock ownership plan). Several companies use this model Southwest Airlines being one of recognizable ones.
There is a saying any plan is better than no plan. I have witnessed plans carried out that have worked well for both parties. A client started a business and left a key employee to run it. He later entered into an agreement to sell to the employee for a substantial sum while he was going another direction. In the end both parties got what they wanted from an agreement that allowed them to transition the ownership.
These examples show the right and wrong ways to conduct our business transition plans. We owe it to our families to handle our affairs so they do not have to. This will protect the value of the business and allow a smooth transition to occur.
Better late than never!
Let us educate you and help you put a buy/sell agreement in place or contingency plan together to fall back on. You never know what could happen. Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.