Selling A Business Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

Seven Keys to Successful Succession

June 10, 2021 By Rick Randel

An internal succession or ownership transition plan is a great option for many businesses. Rather than selling to an outside buyer, an internal succession plan involves the founders or current owners (sometimes referred to as G1 for Generation One), selling their shares to their senior associates or key employees (G2 for Generation Two). Business that are ideal candidates for internal plans include professional service firms and financial advisory firms.

For those of you considering an internal succession or advising clients considering one, take a look at this list of seven key factors that I’ve learned over the years make an internal succession more likely to succeed (this is not really a “how to” article but rather the key ingredients for a successful transition):

G1 and G2 have many personality traits in common (you could even take an assessment tool like Meyers-Briggs or DISC to see if you are aligned).
A reasonable difference in ages but not too wide of a gap (10-20 years is ideal; it’s important for G2 to be experienced and know how to run a business, but still young enough that they want to keep working for another 10-20 years).
The people in G2 each have their own book of business.
G1 and G2 have shared visions/values and common goals for the firm (if some parties want to maximize profits but other parties want to balance profits with lifestyle goals or treatment of employees, that may not be a good mix).
The flexibility and willingness to adapt or change the terms of the plan based on changes in circumstances.
This one is huge: trust. It’s essential for the parties to trust each other, so neither side gets suspicious that the other is trying to take advantage of the other.
Most important of all: start the process early! Especially if you don’t even have a G2 yet. G1 needs to hire a G2 and groom them to take over the business before G1 can get bought out.

G1 can rest assured that planning the transaction is not the same thing as exiting, and G1 can maintain control until they are ready to pull the trigger. G2 can buy in gradually in tranches and/or pay part of the purchase price up front and the remainder over time, to lessen the cost and spread out the payments. I talk about some of these strategies in previous posts, including Ownership Transition Plans and Top Ten Tips.

I hope you’ve enjoyed this list of Seven Keys to Successful Succession. Please feel free to share with others or reach out to me if you have any questions or comments. Thanks!

Rick

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

Is Now the Time?

April 8, 2020 By Rick Randel

My financial advisor friends and I never cease to be amazed at how many business owners don’t have a Buy-Sell Agreement. It’s like going out in the rain without an umbrella. Business owners know they should have a Buy-Sell Agreement but they procrastinate. Partly because they’re too busy, partly because they’re scared of the cost, and also maybe because they don’t want to face their own mortality. Well . . .

Is now the time?

One thing this pandemic has taught us is that we should always have our affairs in order and a plan to deal with contingencies.

So maybe now’s the time to finally do your Buy-Sell Agreement. Do you really want to find yourself in business with your late partner’s spouse? (Or your divorced partner’s ex-spouse?). Do you want your spouse to have to run your half of the business after you’re gone? Or would you rather he or she get bought out by your partner(s)?

A Buy-Sell Agreement can also help you obtain liquidity from your investment in your business, as I described in my previous post Building Liquidity Into Your Buy-Sell.

Or maybe you’re a solo owner with no partners, so a Buy-Sell Agreement doesn’t make sense. There are still many ways you can protect your business and your family should something happen to you. I call it the “Hit by a Bus Plan” (although maybe I should change the title to the “Hit by COVID-19 Plan”). This plan involves interim operating instructions for whoever has to run the business during your absence, transition instructions for your spouse, a salary continuation plan for your family to continue receiving money from the business to pay their expenses, and a key employee retention plan, which in some cases can involve a key employee buying the business from your spouse after you’re gone. For more information about the Hit by a Bus Plan, click here.

Maybe now’s the time to finally adopt a Hit by a Bus Plan to protect your business, your employees, and your family.

Feel free to contact me or your legal adviser if you feel like now’s the time to finally do your Buy-Sell Agreement or Hit by a Bus Plan. Or forward this email to a business owner you know, who might find it helpful. Best wishes and stay healthy!

Can You “Trust” Your Buy-Sell Agreement?

September 14, 2019 By Rick Randel

As many of you know, buy-sell agreements restrict ownership to a small group of owners who know each other and have decided they can do business together. They allow the other owners to buy the shares of an owner who experiences a “triggering event” such as death or divorce.

As many of you also know, many business owners put their shares into their revocable living trust. Which raises the question, what happens upon a triggering event to an owner whose shares are held in a trust?

The typical buy-sell agreement fails to address this situation. I have long suspected the other owners may find themselves unable to buy him or her out.

A recent court decision confirmed my suspicion. A partner whose shares were held in a trust died. The other partners invoked their buy-out rights, but the successor trustee refused to sell. The other partners sued. The court held that the actual partner was the trust, not the trustee. Therefore, even though the individual had died, the partner itself (the trust) didn’t die, and the buy-out rights of the other partners were not triggered. The successor trustee was allowed to continue owning the deceased partner’s shares, despite the other partners’ desire to buy him out. (Han v. Hallberg, 35 Cal.App.5th 621 (2019))

While Han v. Hallberg dealt with a partnership and not an LLC or corporation, a court would likely reach the same result in the corporate or LLC context. The vast majority of buy-sell agreements I have seen do not address what happens when shares or membership interests are held in a trust. A good buy-sell agreement should say that for the purpose of triggering events, the term “shareholder” (or member or partner) refers to the person who is the true underlying owner of the shares, i.e. the person who is active in the business and who the other owners consider to be their “partner”, even if the shares are held in a trust. So a triggering event that happens to that actual person triggers the others’ buy-out rights.

Feel free to contact me if you would like me to take a look at your own or a client’s buy-sell agreement and see if it adequately addresses what happens when shares are held in a trust. If it doesn’t, adding that coverage is a simple fix.

Top Ten Tips For Business Succession Planning

June 1, 2019 By Rick Randel

Start planning early (at least 2-3 years before exit if possible, if not longer).
Get a valuation (this helps us determine whether the business will provide enough value to fund your retirement, what kind of tax hit you are looking at, whether there are estate tax issues, and what level of planning and associated cost are warranted).
See a financial advisor (this helps you determine how much you need to retire among other things).
Train your successor: build the next generation of ownership who can run the company after you leave (this also creates potential buyers).
Build a transferable business, one that can run without you (this runs counter to a lot of owners’ need for control, but you’re just going to have to let go of that).
Be clear about your objectives, including what you’re going to do when you retire. Do you want the most money as soon as possible or are other factors more important e.g. your legacy, the continuity of the firm, continuing its mission, or what happens to your employees and clients? Many owners get their sense of identity from their business and lose that when they retire. Be sure you know who you are going to be when you retire.
Have a Hit by a Bus Plan in case something happens to you before the full exit/succession plan unfolds.
Be flexible/adaptable. Exit/succession plans rarely unfold exactly how they are written at the beginning. Stuff happens. You and your buyer(s) need to be okay with adapting the plan to deal with changed circumstances.
Find buyer(s) with compatible personalities and communication styles, trust, shared vision and compatible goals.
Build a good adviser team. Make sure one of them is clearly designated as the quarterback with overall responsibility to coordinate the process. Let them communicate directly w/each other; don’t keep each one in his or her own silo and only communicate with them yourself.

I hope you enjoyed reading the Top Ten Tips. Feel free to contact me if you have any questions.

Rick Randel Business and Succession Planning San Francisco Bay Area, San Ramon, Walnut Creek

Six Benefits of Succession Planning

September 29, 2016 By Rick Randel

Benefits of Succession Planning Rick Randel San Francisco Bay Area Attorney

Business owners without a succession plan are going to retire on Uncle Sam’s terms, or their family members’ or key employees’ terms, not their own terms. To paraphrase the famous basketball coach, John Wooden:

“Failing to plan is planning to fail.”

Business succession planning presents an opportunity for business owners to:

Smoothly divest themselves of their business
Obtain liquidity to fund retirement or other expenses
Provide for the needs of their family after they are gone
Ensure continuity of the business they started
Reduce the tax burden on themselves and their family; and
Exit on their terms, not the IRS’s or their heirs or competitors

Remember that planning your exit is not exiting. Don’t let your fear of not being in control stop you from acting now to plan your exit. You will still have many years in your business before you hand over the reins (see previous post on this). And if you think about it, planning your exit is the ultimate way of controlling your company: you decide how you leave and what happens after you leave. Nothing is left to chance.

Give me a call if you would like to discuss your business succession plan.

Rick Randel