How does this relate to the owner’s ultimate exit plan?
In private companies, whether an owner plans to transfer the business to children or sell it to a third party, if these areas of readiness — financial, performance and management — are all functioning at a high level, it doesn’t matter which of those choices the owner makes because he or she will have a lot of flexibility in planning the exit. If it’s an internal transfer, the transition will be smoother if you have a good management team and balance sheet. If you decide to sell, you’ll get a higher price with a good management team and financials. There’s a lot of congruence in these areas, and they’re important no matter what the owner’s exit choices are.
What if an owner’s exit is more sudden?
Aside from the all-important planned exit, there should also be a plan for an emergency exit. If something were to happen to the owner of a private business, the company should have a strategy or a document in place for the management team, as well as the spouse.
The owner should take a close look at the buy-sell agreement, and his or her life and disability insurance. Especially in cases of a single-owner business, the owner should leave instructions on who does what tomorrow if something happens to them unexpectedly.
A basic set of instructions could include which advisors to use to help sell the company, or how to hire a new president until the company can be sold. These factors are often left unsaid, and the managers jump in to help, but it creates chaos if you’re not sure who’s in charge. Another way to address this is to form a board to oversee this process. When the business is so concentrated on one person, and something happens, the company can be at risk and place undue pressure on the spouse.
All owners will have to exit their businesses at some point. We feel it’s best to be prepared, because the consequences of not planning properly could be severe both personally and financially for the owner.
Mario Vicari, CPA, CVA, is a business advisor and a director in the Audit and Accounting group at Kreischer Miller. Reach him at (215) 441-4600 or [email protected].
