Are you a business owner? If so, you need to consider the following truth: someday you will exit your business.
That's right, eventually your business will either be liquidated or run by somebody else. For most owners of closely-held businesses, this reality is hard to imagine because; they are so focused on because they are so engrossed with day-to-day business operations and growing the business. Exit planning, estate planning and eventual retirement never seem to become a priority.
But the failure to plan for the owner's exit results in another truth: the value of the business will be sacrificed when it is sold at a fire sale, liquidated, or hit with huge estate taxes when it is passed without careful planning to the next generation.
Perhaps the most important step in business exit planning is for business owners to identify and train successors. Whether the business is sold internally, sold to third parties or passed to children, a business owner must be able to find someone else to manage and grow the business in order to preserve and “harvest” the business value they have created. Let us share a successful business succession story.
For the past 31 years, Bert and Lavon Honnen have been the primary owners and managers of Profit Plus Inc., a payroll, and bookkeeping and tax preparation business in South Anchorage. Profit Plus has nine employees and offers outsourced payroll services, bookkeeping and income tax preparation to its clients. Bert, who has been the driving force behind the business since its inception, turned 80 this in July. It wasn't until this year that Bert and Lavon starting thinking seriously about their business exit strategy.
As Bert and Lavon considered their options, including liquidation, third party sale, or transfer of the business to their daughter, Alice Liedke, who also works in the business. When Alice expressed a desire to retire as well, made, it quickly became apparent that the best option was to find and train a successor from within the company.
Enter Yvonne Bogart, age 37, who grew up in the village of Port Heiden. Yvonne did not have an opportunity to attend college and she describes her professional qualifications as “on the job training” in accounting and management at an Anchorage automobile dealership before joining Profit Plus in 2000.
“She has been a key employee who has the ability, background, drive and personality to take over the business,” says Bert. “It wasn't in my psyche to sell to a third party. This was more like selling to family.”
Before approaching Yvonne, Bert and Lavon engaged the services of a business attorney and a CPA to help them come up with a strategy for selling the business. Most employees do not have cash or the ability to finance a business buy-out and Yvonne was no exception.
It was apparent that this sale would require Bert and Lavon to finance the sale so that Yvonne to could purchase the business out of future business cash flow. Company cash flow suggested a six-year buyout. Such a strategy can be risky for a business owner, but Bert had a plan: he and Lavon would continue to work for the business and assist Yvonne with company management until the purchase was complete.
Bert wasn't ready to completely retire and the idea of selling now and coaching the new owner suited his interest and desires. As it turned out, it also appealed to Yvonne.
Bert and Lavon approached Yvonne in March of this year with a proposal for her to purchase the entire business from them.
“Alice wanted to retire. I was flattered that they chose me,” Yvonne says. But she also admits that the idea of buying the business was a little overwhelming. “I wasn't sure if I wanted the responsibility, because it becomes part of your life for 30 years and you can't just change careers. The financial risk was scary.”
Yvonne became convinced that she could face the risk of business ownership when Bert explained that he would continue providing support and training for the next five or six years. “It wouldn't work out without his training and help,” Yvonne says.
But the training took an unexpected turn even before the sale took place. “Yvonne needed to upgrade her wardrobe and look like the business owner that she is,” Bert says.
So Bert offered Yvonne a cash bonus and a professional shopper at Nordstrom so that she could purchase professional attire. He also suggested that Yvonne have a personal makeover at Halo Salon.
So did Yvonne take offense that the metaphor of grooming a successor became literal in this case? Yvonne admits that she cried when Bert suggested the makeover.
“Nobody has ever been that gracious to me before,” she says, the emotion still catching in her voice. Yvonne says she did not have much training on how to dress for success.
“I never really experimented with my hair before, because it is so curly,” she says. “The professional shopper chose clothes I would have never picked out.”
The sale was closed on June 30. Everyone is satisfied with the arrangement so far. The company is expanding its business consulting services as Bert reaches out to help other small business owners learn how to succeed.
“I'm a happy camper,” says Bert. “This morning I found Yvonne going over the company financial.”
He is clearly delighted that somebody else is interested in the bottom line.
And what is the most challenging part of being an owner for Yvonne? “Getting used to sitting in the head chair,” she says.
What steps are you taking to groom your successors?
Richard and Susan Foley are the founding owners of Foley & Foley, P.C., a full-service estate and business planning law firm. Learn more about them at www.foleyfoley.com.
