Jerry Ripperger
National VP - Stock Plan Services Consulting
The thought of spring cleaning in the middle of winter can invoke a variety of reactions. Some are excited by the idea of freshening up and seeing things anew. Others groan and dread the very thought.
The same reactions are often exhibited when a business owner is discussing succession planning. It’s important that the business owner take a spring-cleaning approach with a well thought out plan to avoid many of the common pitfalls.
While the owner may be excited about the prospect of selling their company it takes more than that to be successful. There are several areas that they should consider addressing prior to approaching a sale.
Is there successor management in place?
Business valuation professionals will look at both objective and subjective factors when determining company value. One of the most important subjective areas is company leadership, particularly if the owner is no longer going to be actively engaged. Is the management team sufficiently experienced? Do they have the necessary client and industry relationships to continue current performance levels? This can be particularly important if the selling owner is responsible for generating a significant portion of historical sales. How will this be replaced?
Are other family members employed by the company?
If so, what is their plan going forward? Are they paid a market salary? Do any of them have an ownership stake that will have to be worked out during any transition?
Are the financial records in good order?
The line can sometimes blur between company and personal financials. When preparing for a sale, it’s important to clarify those lines and make sure the financial statements clearly reflect the company’s operations. Some questions to ask:
• Are there items being paid by the company that will be paid by individuals post sale?
• Is there property owned by the company that will not be part of the sale? This often applies to real estate holdings.
• Are there tax strategies in place that minimize or maximize company earnings that are not reflective of the go-forward organization?
• Are there assets, such as patents, that are owned by individuals that the company relies on? Will those become part of the company?
Does the company have clients or suppliers at risk if ownership transitions?
Does the company have a concentration risk with significant revenue tied to a small number of clients or contracts? If company ownership transitions are they at risk? It may be a good time to review contracts with key clients and suppliers to understand any change of control provisions and take action to avoid potential issues.
This isn’t an exhaustive list. The selling owner may want to engage a sell-side advisor to help them understand how to maximize company value, best position it for sale, and structure the transaction. Planning is key, especially for something this important.
