Ten Reasons Businesses Change Ownership
10 Reasons You May Need a Business Transition Plan
Why do businesses change hands? For most closely held business owners, the process of transition is indeed a painful one, having to part with one’s baby and to face the change that inevitably must come once that happens. How we hate change!
Top 10 Business Transition Plan Reasons:
- A primary owner dies unexpectedly. That’s it. It happens, and control passes. The owner isn’t thinking about transitioning the ownership of his or her business, but death happens. We might ask a few questions here. To whom did ownership pass? Is there a buy-sell agreement that will dictate the pricing and terms of the ownership sale? Is life insurance in place to fund the purchase of this owner’s shares? Were there appropriate plans in place to assure a smooth transition, not only of ownership, but of management, as well? These are things to think about while we are still alive. Otherwise, our families, fellow owners, key employees and others are left to sort things out under often unfavorable and difficult circumstances.
- A key employee leaves. This employee’s departure could trigger the necessity to sell the entire business under unfavorable circumstances. This might be particularly true if this key person takes important contacts, critical energy, and/or leadership that keep things going and growing. A couple of questions to ask include: Does your business have such an employee or employees? Are they owners of your business subject to buy-sell agreements and/or employee agreements, if appropriate?
- The owner gets “tired” and decides to sell. This is an unbelievably frequent reason why business ownership transfers occur. You may think that this circumstance might only happen with really small businesses, and not a larger business. Not so. If you as a business owner wait until you are “tired,” you are already on the downside of the value curve. Tired owners almost unavoidably transmit their “tiredness” to employees and customers in many subtle ways. In the process, their businesses may lose the vital force that is critical for ongoing growth and success.
- Unexpected offers come along. Occasionally, business owners receive unexpected offers to purchase the businesses. When this occurs for a particular owner, s/he sometimes will sell to the surprise bidder or else decide then to put the company “in play” and sell to another, higher bidder. We might ask a few questions. Was the business ready to be marketed? Was the owner ready for a transaction with his or her personal planning in place? Was the stock of the business distributed to family or other employees such that others could benefit appropriately? Just because someone comes along with a good price, even an outrageous price, does not mean that you are ready for ownership transition and sale.
- Business reversals happen. Perhaps a company fails to adapt to changing markets, competition arises from unexpected quarters, or an accident or bad luck generates substantial losses. Sometimes the affected business never recovers and forced sales result. This is obviously not a desirable outcome.
- The primary owner divorces. Marital dissolution where closely held or family businesses are substantial marital assets occur with increasing frequency. Wild card divorce judgments can create settlement terms that are so onerous that a business needs to be sold to settle the marital estate. Emotional changes resulting from the divorce can also create the necessity or the desire to sell the business.
- Life-changing experiences occur. Business owners sometimes encounter life-changing experiences such as heart attacks, cancer, or close calls with death in accidents. We all experience the death of parents, spouses, and friends. Such events can trigger significant changes in the desire to own and to manage a business. The emotional of physical shock of such experiences sometimes fosters a strong desire to “do things differently with the rest of my life.” Business transfers can be the eventual results of these or other life-changing experiences.
- Gift and estate tax planning. Owners of many successful, closely held and family businesses engage in gift and estate tax planning as a normal means of ownership transfer. Interestingly, the absence of proper gift and estate tax planning can precipitate the forced sale of a business if an owner’s estate lacks the liquidity to handle estate taxes, or if a failure to plan for orderly and qualified management succession cripples the business when the owner is no longer there. See reason number one above and think about your own estate tax planning.
- The second (or third) generation is not up to the task. There is substantial research indicating that most businesses do not survive to a second generation of family ownership.
- Normal lifetime planning dictates timing. Finally for this list, businesses sell as result of normal lifetime planning by their owners. These owners plan for and execute the sales of their businesses on their own timetable and terms. Numerous transfer mechanisms are employed in such transfers, including management buyouts (MBOs), Employee Stock Ownership Plans (ESOPs), leveraged recapitalization, and other corporate finance techniques that are used to facilitate ownership transfer, in addition to outright sales. Quite often, such transfers occur over time while ownership and management are transferred in orderly fashion.