No two succession plans are the same, but all of them have one thing in common – they require planning and usually years of it.
“It’s really a matter of making sure everything is in place,” said Jeff Nyman, broker at First Choice Business Brokers. “[The goal] is that, when a buyer looks at that business or a family member looks at it, they are not going to say, ‘I have to take this from scratch and build it.’ Rather [they say], ‘I can build on to what’s already existed.’”
Primary Options
Business owners have a variety of options to consider when it comes to succession planning and who will take over. Each plan will be unique to the business and the owner, but the two primary options include passing it down to a family member or selling it.
“Each plan looks different,” said Kyle Bybee, CEO of Fair Anderson Langerman. “Some owners may want to exit completely. Others may want to stay in the business and, sometimes, that’s required as part of the deal. It’s going to look different for each of them. While structuring and looking at the technical components are important, there’s a lot more to it, especially if you’re dealing with succession with a family member which includes the wishes and aspirations of the family and the legacy.”
Passing a business down to a family member is usually the first route to consider in succession planning, although it has lost popularity in recent years.
“I feel that if there is a business that a person owns, and they are thinking ‘what do I do with the business?’ They should be talking to their family first to see if anyone wants to take over,” said Nyman. “Many times, we will do a valuation for a person who just wants a valuation because they’re already passing it over to their son or daughter or whoever it is, but they should have their books in order.”
Second to checking with family members, business owners should see if there is any interest from parties who already have a vested interest in the business.
“You can pass a business to an employee,” said Kathryn Guthrie, broker at Liberty Group of Nevada. “Generally, that involves the employee buying the business in some manner. Whether that’s a workout where the owner gives a loan to the employee and then the employee continues to run the business, or they pay the owner as they go. Frequently employees don’t have enough money to buy the business from the owner on their own.”
Selling the business to a third party is also an optional route for business owners and largely depends on the size and type of business that it is.
“It can be anywhere from an individual buyer, all the way to private equity groups that are looking to expand an existing, larger business,” said Katrina Loftin, cofounder of M&A Business Advisors. “A smaller business, such as a business valued under $2 million, is usually [going to sell] to an individual buyer. Those people are usually corporate America, just looking to own their own business and are typically handled with SBA financing. Over $2 million and you’re looking at different buyers. You’re looking at, sometimes, competitors. Sometimes, you’re looking at private equity groups who come in and, either take the company on as a platform investment, or as an add on to an existing group of businesses that they already own. Typically, those transactions will have the seller stay on for a year to two years, possibly, and then they will replace them with existing management.”
Closing the doors may also be a part of succession planning, especially in the instance where the owner fulfills all the roles of the business. “It does happen where businesses decide to close down,’ said Bybee. “Usually, [with] the successful businesses that have been around awhile, there’s a lot of emotion and blood and sweat and tears into building that business and most business owners want to see some level of continuity and get some kind of value in return.”
Expect the Unexpected
Just as there are hurdles in building a business, exiting a business presents its own unique challenges for owners. Chief among them is a lack of planning that presents obstacles for when an owner is ready to exit.
“Usually, lack of planning is the biggest [hurdle],” said Bybee. “Specifically, that can involve not having good financial records, being unrealistic about a price or just being disorganized.”
Obtaining the desired valuation for the business is also a major hurdle that business owners seek to overcome in succession planning. “If a business is not keeping accurate records, it is very difficult to get a valuation so that the business can be passed on, even to a family member,” said Nyman. “We find that a lot of small and medium sized businesses don’t keep accurate records of their expenses. We have to almost go back in and work with them to try and figure out what the real income is of the business, which is the basis for the valuation.”
Customer concentration can also affect the value of a business. “If you have one big customer that accounts for 20 percent or more of your sales, that is going to affect the value of your business in a negative way,” said Loftin. “It will actually go down if you have customer concentration like that. Most people think that it’s a good thing, [but] it’s actually not.”
Additionally, many business owners can risk their company’s value down the line by co-mingling personal and business expenses. “
Most business owners tend to run personal items through the business like their vehicles, travel expenses, things like that,” said Loftin. “It’s best not to do that. If you are going to do that, there is a way to do it legally and the right way where the broker can add it back, but most people don’t do it the right way and they will lose money on the value on that.”
Nevada Market
The Nevada market for buying and selling businesses is at a high point. “It’s not a buyer’s market; it’s not a seller’s market,” said Jeff Nyman. “It is very even. You’ve got a lot of people who want to sell and lot of people who want to buy. Business is good.”
While there is a range of contributing factors for businesses doing well in the Silver State, perhaps the most significant is the increase in business owners due to a mass exodus of entrepreneurs from other states. “The current market in Nevada is outstanding,” said Loftin. “It’s the best I’ve ever seen, by far. California has done a lot. Their taxes are ridiculous so it’s hard to do business in California anymore. Nevada is a very business friendly state and that really helps. We are just growing. In northern Nevada we have a very diverse business climate. It’s not just gaming anymore. A lot of people have moved up there from the Bay Area and other states are moving in. We are a very affordable state still to live in. Even though it seems expensive to those of us who lived here for a while, it’s actually pretty affordable compared to other states and a great place to do business.”
The COVID-19 pandemic has also had a significant impact on the Nevada market for buying and selling businesses. One notable, and often overlooked effect, has been the shift in work mentality from worker to entrepreneur due to layoffs and work from home protocol. On the one hand, many workers experienced being put on unemployment and the harsh reality of their expendability to a company. On the other hand, those who were required to work from home for over a year found themselves unwilling to return to the constrains of working at the office. These mental shifts have resulted in many more buyers entering the market who are looking to be self-employed.
COVID has also created more sellers in Nevada. Restaurants in particular, which were hit hard by COVID restrictions, are entering the market at a more rapid pace.
“We’ve had a lot of interest from restaurants where they had to close part of the year,” said Nyman. “[Restaurant owners] will come to us and say, ‘I had problems during the recession and now I’ve had to close during COVID, I don’t want to go through this again. It’s time for somebody else to take over.’”
Interestingly, restaurants are not moving as quickly on the market. “Restaurants are having a hard time selling mostly because of staffing right now,” said Guthrie. “There’s a high turnover for employees and that’s especially true in service industries, like restaurants. That does make restaurants more difficult to sell.”
Starting the Process
Creating a business takes time and so does exiting one. Even if an entire business was built singlehandedly, it likely won’t be exited that way.
“The first thing to know is, it is a team sport,” said Guthrie. “Succession planning isn’t something we recommend owners do in a vacuum by themselves. We recommend they talk to their financial planner. We recommend they engage with their accountant and their lawyer and, potentially, a business broker if sale to a third party is something that they are considering as part of their plan.”
With so many aspects to consider and so many moving parts, the question of where to start is an important one to ask.
“For a business owner who knows they eventually want to sell or pass along the business I say, give it time,” said Bybee. “Maybe take a year. The first few months, discuss it with those around you such as your family, some close advisors, maybe some key people in the organization and talk about your plan. How would you want this to look? How do you want this to be structured? After those initial discussions, start to work on your plan and refine it for the next few months. Then it’s a good time to revisit it. Do you still feel the same way? Then spend the last part of the year determining how you want to implement the plan. That’s going to involve different advisors.”
Planning Ahead
Failing to plan is truly planning to fail when it comes to exiting a business. Although it is easy to get swept up in the day-to-day activities of business, when an owner decides they want to sell or pass the business to a family member, the best thing they can do is plan and prepare years in advance.
“I would say the number one take away would be to plan and plan as early as you possibly can,” said Loftin, “Even if you’re not thinking of selling in the next five to ten years, you just never know what’s going to happen, so you always should have a plan in place.”
The “how” of exiting a business can be found in the counsel of advisors, but the “when” is unique for each owner.
“It really comes down to what they want to do,” said Bybee. “Do they want to move forward or not? That’s not going to be decided based on their financial statements. That’s going to be decided on when they’re ready to start this process. And, in some instances, that may be more of a gut decision. Do they feel that it’s the right time? Many business owners as they go through this, need to ask themselves the question, ‘Am I going to be ok, even psychologically, not having this business in the end? This is what I’ve always done. This is what I’ve put so much time into.’ Sometimes it’s not just data driven, it’s almost, what does your gut and your heart tell you? Is now the time to start?”
