Articles Posted in Exit and Succession Planning

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  • Effective strategic planning for the closely held business owner should begin with a formal valuation.

  • The information gathered and considered in a business appraisal provides insights into the business overlooked in day-to-day operations.

  • Valuation studies provide an insight into the potential value of the business and roadmap to to becoming a ‘best in class’ enterprise.

You own a business. You’re deeply familiar with your company’s day-to-day operations, challenges, and triumphs. You have invested your time, energy, and resources into its success.

You may have a rough estimate of what it is worth, guided by your years of experience, what you know of your industry, what you hear on the grapevine and your gut instincts. (Stastics tell us that more often than not, your beliefs are pretty inaccuate.)Money_Coin_Stack_On_White_Background_original_1746958-1024x683

Valuation: the First Step to a Successful Strategic Plan

The business owner who really wants to understand the value of a business and make informed decisions, you need an objective, data-driven analysis. This is where a formal business valuation is usually indispensable.

A formal valuation tells you the value today, of course. But to the the owners of the business, it is, or should be, much more than that number. A formal valuation conducted by a Certified Valuation Analyst (CVA) or other qualified professional is a full diagnostic exam for your business. It yields information you won’t get anywhere else.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Here’s an example. A valuation focuses on comparisons to other similarly situation companies. Here is a snippet of analysis of key financial data from a calclulation report. It compares the performance of the company being valued with its competitors in the same industry in key areas using a percentage-based analysis.

RMA-Study-copy

A good, formal valuation drills down into a company’s financial and operational health, revealing insights that might otherwise remain hidden. This particular report tells us that this business is lagging on its ability to generate gross profits and that in other areas it is the middle of the pack.

Exceptional value in a business isn’t driven by mediocrity, and if and when the owners of this business try to find a buyer, these numbers will be reflected in a business that either cannot be sold or that is being sold at a much lower value than it could have brought.

Continue reading

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  • Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.

  • Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.

  • Intangible assets include customer relationships and intellectual property.

I sometimes ask closely held business owners if they lock the doors to their business when they leave. The answer is ‘of course.’ I may push further. Do you have an alarm system? What about at home?

No surprises here. Everyone locks the door. Most have alarms. My follow-up question is ‘for what?’ The answer, again, is obvious. We lock doors to prevent thieves from stealing our stuff. Then why do so many of us do nothing to stop thieves from stealing what is commonly the most valuable asset of our businesses?Risk Mitigation through Business Buletproofing

Bulletproofed Businesses are Protected Against Theft of Intangible Assets

So many closely held business owners protect themselves against the theft of office equipment, but leave the doors wide open and invite thieves to help themselves to their most valuable property—those intangible assets that drive sales and efficiency.

The value of these assets is rarely reflected on our company’s balance sheet. Instead, the value is found in the knowledge and skills of our employees, the relationships we have with customers, and the reputation we have built in the market.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Many closely held business owners have no clear idea of the value of their intangible assets and are badly misinformed about what can be protected and how that is done. I am surprised how often my clients think they there is nothing they can do, and how little importance they give to writing down what they have. Continue reading

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  • The Need to Exit Our Closely Held Business is Non-negotiable.  We all leave, eventually.

  • Exit and succession planning protects our business, our employees, and our families.

  • The effects of most business disasters are avoidable.

“Hope is not a strategy.” Vince Lombardi

If you own a business, you know that ‘winging it’” is not much of a business plan; it’s a recipe for disaster. Exit and succession planning isn’t a luxury; it’s a necessity. It’s not about if you’ll exit your business, but how and when. Lombardi during his career went from assistant coach at St. Cecilia’s High School in Englewood, New Jersey, to leading the Green Packers to two Superbowl victories. Lombardi always had a plan. He wasn’t talking about guiding a closely held business, but the thinking fits. And here is why.

1. The Inescapable Reality: The Grim Reaper is Undefeated

Let’s start with the cold, hard truth of mortality. No matter how invincible we feel today, there will come a time when we will no longer lead our business. We know that to be the truth. We are all leaving the job.  Planning helps us avoid the potential that we leave feet first.

In much the same way, we know that we need the income from our business to support our lifestyle and the people that matter to us.  Yet, if we are like most closely held business owners, we are all in on the company and the business is the largest single asset we own — in many cases, 75% of our net worth.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

We might envision a graceful retirement, maybe golden years on a beach somewhere. Or maybe from our status as entrepreneur emeritus, watching approvingly as the next generation carries on our legacy. It’s fuzzy and warm.  But without a plan, the chances of that happening are like winning the lottery.

Without a well-defined exit plan, our business faces a chaotic and uncertain future. Our families and our employees, could be forced to make hasty, ill-informed decisions about the fate of the company.

Continue reading

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  • Business owners that fail to plan for their lives after exiting their business often report ‘seller’s remorse’ and dissatisfaction with their lives.

  • Understanding and planning for the personal after exiting a business focuses on two-part personal question: who we are outside of our business and what are our personal goals.

  • Formal written plans for life after exiting a business are a critical aspect of exit planning.

Business owners thinking about exiting their companies tend to focus on financial and operational considerations. However, an often-overlooked, yet crucial component is the personal leg of the exit planning stool, a framework popularized by the Exit Planning Institute (EPI). Effective exit planning, as outlined by the EPI, involves balancing three critical legs of an exit planning stool: business, personal, and financial. This more-holistic approach ensures that all aspects of the owner’s life are considered to achieve a successful transition.

The personal leg, which encompasses the owner’s personal goals, well-being, and plans for life after the business, is frequently neglected in favor of more tangible financial or business concerns. However, the EPI’s 2019 and 2023 surveys show that business owners who fail to plan personally for life after the transition are at risk of dissatisfaction post-exit, potentially leading to “seller’s remorse.” Continue reading

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  • Using keyman insurance to fund equity redemptions is likely to increase estate tax liability.

  • US Supreme Court holds that keyman insurance proceeds of company-owned policies are an asset of the company, regardless of a contractual obligation to fund an equity redemption.

  • Cross-purchase agreements funded by insurance should avoid these estate tax liability issues.

Effective succession and exit plans commonly use insurance as a funding vehicle to protect the owners from the economic effects of the death or disability of one of the principals. If an owner dies or becomes disabled, the insurance kicks in to fund the cost of a buy-sell agreement, ensuring a smooth transition of ownership.

The reason: When business owners die, the transition of their shares will disrupt the company and create financial burdens for the surviving shareholders or the company itself unless the owners have a plan in place.

The Importance of Keyman Insurance to Closely Held Businesses

To address this need, closely held businesses often use keyman life insurance in conjunction with buy-sell agreements. These agreements ensure that ownership transitions smoothly, and the business continues operating without major financial strain. (Insurance and other financial vehicles are also effective means of funding a transition out of the business for retirement.)

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

However, the structure and tax implications of the insurance-funded plan can differ depending on whether it is used in a redemption agreement or a cross-purchase agreement. After a recent United States Supreme Court decision imposing a million-dollar deficiency on an estate, closely held business owners need to review any insurance-funded plans to ensure that they are not unwittingly taking on an estate tax burden.

The Supreme Court Upsets the Status Quo

The Supreme Court’s landmark decision in Connelly v. United States is unwelcome news for those closely held businesses that have purchased keyman policies to fund the company’s purchase, or redemption, of a deceased shareholder’s interest. Continue reading

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  • The benefits of exit planning and succession planning are more than improving the prospects for a future sale at a good price.

  • Closely held business owners that implement the Value Acceleration Methodology can expect to improve profits now and to free up more of their own time.

Succession and exit planning are critical steps that enable the owners of closely held business to maintain and preserve the financial and social legacy of the enterprise they built. Whether the goal is to retire, to move on to another venture, or simply reduce the need for day-to-day involvement in running the operation, exit planning strategies are key.

Business-calculator-showing-profit-1323150-880x1024Perhaps even more important, exit planning is good business. Thomas Deans, writing in Every Family’s Business, cautions that every business should be ready for sale every day and, if the price is right, the owners should consider a sale.

Exit Planning is Good Business

The point is this: If a business isn’t ready for a sale, then the owners are leaving money on the table. Not just as in someday, but as in today. The hard fact is that most business owners have a disproportionate amount of their personal wealth tied up in a business that statistically they are unlikely to be able to sell.

Many businesses simply close their doors at the end of their founder’s work life, an unnecessary and avoidable result. Continue reading

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  • Exit planning describes the process of preparing a closely held business for the exit of its owners at its maximum value. It is the preparation and implementation of a plan that maximizes the current and future value of the business. 

  • Exit planners help owners understand the true value of their business today and what its potential value will be at the time of sale.

  • Most business owners seeking to sell their business will not find a buyer.  Exit planning vastly improves the marketability of the business and captures the most value for the owners. 

Succession and exit planning assure that the closely held business owner can maintain and preserve the financial and social legacy of their company, whether the goal is to retire, move to another venture, or simply reduce the need for day-to-day involvement in running the operation.

Studies indicate that 75 percent of private business owners would like to exit their business within the next 10 years.   2023 National State of Owner Readiness Report.  Closely held businesses are typically family-owned or controlled and most of the owners of those businesses favor passing the business to the next generation.  An effective exit plan will usually require three to five years to plan and implement.

Exit Planning Using Proven Strategies and an Extended Network of Professionals

Exit Planning Advisors

The Exit Planning Institute (EPI) has developed a comprehensive, multidiscipliary framework for developing a robust exit strategy, focusing on maximizing value, ensuring business continuity, and preparing for the future. EPI’s network of Certified Exit Planning Advisors (CEPAs) includes lawyers, wealth consultants, insurance advisors, merger and acquisition firms, family business consultants, accountants, and management firms.

CEPA_Transparent-Background-1-300x84A CEPA has access to this network of professionals, in and out of EPI’s network of advisors, and a thorough understanding of a proven strategy for business value enhancement that can increase the value of some businesses by 2–8 times when implemented.

Exit plans provide the framework that enables owners to step back from their day-to-day responsibility for their closely held enterprise.  This process of transferring the day-to-day oversight to others not only enables a seamless transition that safeguards the owner’s legacy and financial security, but it also gives the owner a level of persona freedom that many have never experienced. Continue reading

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  • Understanding the valuation of the business is critical to the owners of closely held business in planning and management.

  • Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise. 

  • Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.

Business Valuation for Closely Held Business Owners

Understanding the value of your business is critical to the management and operation of a business, to protecting the value of the business, and to planning for the future. Many owners see valuation as an issue that you need to look at at certain stages in the life of the business—wwhen someone dies or gets divorced, when it’s sold, or when there’s a tax issue.

That value, however, doesn’t consider other, crucial reasons why valuation is necessary for the business owner. The reasons are both defensive and offensive. For example, you cannot know how much insurance you need for your business if you’re just guessing about what it’s worth. You need this information for the defensive purpose of protecting your investment.

Offensively, business valuation is a strategic tool that offers insight, guides decisions, and uncovers opportunities for growth.

Business owners, on average, have about 80 percent of their personal assets tied up in their businesses. But four in ten owners of closely held businesses have never had a formal valuation of their business done.  Many more owners do not have a clear picture of what the business is worth today. Continue reading

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  • Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.

  • Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable. 

  • Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Restrictive covenants such as non-compete and non-solicitation agreements are vital to the stability of a closely-held  business. Let’s examine how these agreements can be used to protect the value in the most important drivers of value, the intangible assets in your businesses.

Female-entrepreneur-signing-514339-1024x683

Female entrepreneur in casualwear sitting at wooden table and signing contract after successful completion of negotiations with business partner, close-up shot

Intangible assets are things like intellectual property, customer relationships, and proprietary information. Businesses can prevent employees or rivals from misappropriating these assets by implementing  effective restrictive covenants.

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I am a lawyer, a certified valuation analyst, and a certified exit and succession planner.  I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

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Securing these intangible assets is essential in the business world for preserving a competitive edge, achieving long-term success, and increasing a company’s worth.

Are Restrictive covenants Becoming Unenforceable?

The restrictive covenant, however, is under attack from a number of sources. They may be difficult to enforce and in some states unlawful. Continue reading

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  • Intangible Capital are the elements that define a company’s real earnings capacity and its value.

  • The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.

  • Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

We talk a great deal about how the most important assets of your business are those that can’t be seen or touched. I want to discuss something that exIt planners refer to as intangible capital. Intangible capital groups your intangibles into four classes that a business owner can identify, strengthen, and, in the process, grow their companies and make it more valuable.

Understanding Intangible Assets and Their Effect on Value

The most important and valuable assets of almost every business are the intangibles. They’re something that you can’t find on a balance sheet, but something that you need to understand, protect, and cultivate.

And they are critical to the business owner who is seeking to maximize the value of the business and who is planning an exit strategy.

Tangible assets are things like machinery, real estate, inventory, intangible assets, or things like intellectual property, patents, trademarks, copyright, brand recognition, customer relationships, goodwill, unique processes, and other kinds of proprietary technology. Continue reading

Contact Information
Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
90 Broad Street
New York, NY 10004
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