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By Todd A. Feuerman, CPA, CCA, MBA, Director

According to the Pew Research Center, the rate of retirement by Baby Boomers has accelerated dramatically. In Q3 2020, more than 28 million Boomers reported that they’d retired, a rise of 3.2 million from the same quarter in 2019. While this adds to an already serious labor shortage, it also means a significant number of business owners are either selling their companies or handing them over to a family member or employee — sometimes all of the above.  

Due to the multitude of questions surrounding the process and the types of sales involved, changing ownership can be one of the most challenging periods in the lifecycle of a business. But it doesn’t need to be this way.  

As with virtually any endeavor, proper preparation and knowledge can help alleviate many of the headaches associated with an ownership transition. And the process begins with several vital questions an owner should always consider before starting to seriously consider a succession plan.  

 • What can be done to maximize enterprise sale value?
 • How can key employees be retained during the transition? 
 • How can business interruption and disruption be minimized?
 • What contingency plans are included for unexpected life circumstances and business changes? 
 • How will tax obligations be minimized?
 • What if a sale falls through? What contingencies are in place to make sure the business operations are maintained until a transition does happen?

Begin With A Solid Plan For The Future

First of all — don’t panic. While this list of questions may seem daunting at first, tackling them starts with four steps taken at the beginning of the succession planning process. These steps will help limit risk and make sure nothing has been overlooked.  

1) Don’t Have an Experienced CPA Firm? Get One. Potential owners (and their bank lenders or investors) will want to rely on credible financial statements and tax returns for the past three years or more. All financial transitions will need to be properly accounted for to avoid raising any red flags that could slow down or prevent the sale.

2) The Timetable Should be Realistic. This is a vital step that if overlooked, could have significant consequences. A full transition can take months or even years. Even before a decision is widely known, it will take time to build a succession planning team. This can consist of outside professional advisors, investors, the management team, board members and others.  

3) Make Sure Employees are Well Prepared. Have an executive team in place that is highly trained and ready to continue the work of the company. Then, be sure to communicate the long-term vision of the company with the entire workforce. Employees will need to feel positive about the prospect of change and the future direction of the company for a smooth transition.

4) Operating Processes Should be Set in Stone. Give the employees the benefit of a solid foundation from which to grow or adapt with the new ownership. A tight ship will also appeal to potential owners who won’t need to start from square one.

Transition Types Are Not All The Same

Once the four steps listed above have all been addressed, it will be time to take a hard look at the type of transitions that the succession will fall under and which one makes the most sense for the business. Some of these are more well-known than others, but still just as effective. Again, being prepared for every possible hurdle and outcome will help alleviate much of the stress that an ownership transition can create.   

External Sale
Generally, a third-party sale provides the highest level of arm’s length value for the selling party, the greatest cash payment at settlement, and the optimum ability to go to closing by both parties. However, an external sale will most likely have fairly significant non-compete and employment agreements, which will severely limit the exiting shareholder’s ability to continue within the industry in the near term. An additional concern with an external sale is that it creates the most exposure to future change in operations, employees and company culture.  

Internal Sale
Under a new ownership structure and management team (which could be family members, key employees, or a combination), a company will secure funding from a bank in order to buy out the current owners, or the existing owners may provide self-financing of the transaction. The bank or selling note holder would be paid off over the term of the note using future operating cash flows. Generally, a bank note would require significant collateral and personal guarantees from the new owners and perhaps even the selling party.

The current owners would identify a financial partner willing to acquire a majority of the stake in the company. The financial partner typically invests heavily in the company and ultimately seeks a premium with a three- to five-year exit window. Traditionally, a financial partner may be a private equity firm, mezzanine firm, or financing firm that may have developed a particular niche in the particular industry. While there is exposure in a recapitalization transaction, there may be a considerable benefit if the future or second level exiting transaction is successful.

Employee Stock Ownership Plan 
An Employee Stock Ownership Plan (ESOP) trust is formed in order to acquire stock from the selling owners in exchange for liquidity. Shares are then allocated over time to the accounts of eligible employees based on various factors. The ESOP offers the opportunity to create significant tax savings to the selling C corporation shareholders as well as to the continued operating company, if the company makes an S corporation election.  

Old Company And New Company Plans
While the old company ceases to build up value along with its operations, the newly formed company finishes the sales backlog left behind by the old company under a project transition services agreement. This provides a method to transfer an existing company to a single person or a management group that may be able to bypass many of the difficulties of an outright sale. The new company will build up financial strength while the old company remains under the original owner’s ownership and control, and a new company is formed to manage new work to the business. After a period of time, the old company will be dissolved and only the new company will remain.  

The Final Lesson? Never Be A Lone Wolf

While many business owners may have started their companies with little help, the overall success of any business comes down to the assembled team of employees and experts. A successful ownership transition is no different. Flying solo through a succession process is never a good idea and frankly, no one can do it alone. Having a team of trusted lawyers, financial planners, and perhaps most importantly, accountants, who are all highly experienced in ownership transfers, will help make the entire process infinitely easier — and reduce critical (and costly) errors and oversights.  

A business succession is usually a once-in-a-lifetime opportunity, so making the process as easy as possible should be the main objective. If done properly, a well-crafted succession plan will not only make things seamless but create the foresight to navigate unforeseen obstacles that can cloud what should otherwise be a memorable and potentially profitable endeavor.  

TODD A. FEUERMAN, CPA, MBA, CCA, is a director in the Audit, Accounting and Consulting Department of Ellin & Tucker in Baltimore, where he oversees audit, accounting, consulting and tax services. He received his BS in Accounting from Towson University and MBA in Finance from University of Baltimore’s Merrick School of Business. Todd can be reached at 410-727-5735 (ext. 3066) or