Mar. 23rd, 2015

Spotlight: Part 1-Transferring the Business: Closely-Held/Family-Owned

Jerry Nichols, CPA

Over the next few months, join me in a discussion of the when, why, for how much or not to transfer the closely-held or family-owned business. I have been privileged to partner with a number of businesses in West Michigan during my career. From this time, I have observed many attempts to transfer the business, some with success, and others with failure. With a small business, the impact of changes in products, technology, regulations and the economy must be understood for continued success. Being able to adapt to these changes brings value and a future for the business.

A business has strength in one of four primary areas. These strengths will establish a monetary value for the business or provide the future of the business for the next generation. The four strengths are: people and culture, product or process, pipeline and plant. Consider these four ‘P’s for continued success. It is not necessary to have all of these strengths, but one of the areas needs to be a dominant characteristic. These strengths are translated in to better than average earnings.

Business owners come in all shape, sizes and skills. There are some who do not have the skills to operate a successful business. Over time, these owners are out of business. Others have basic skills that allow them to have a career. They were able to make a good living, support their family and contribute to the community, but do not have the something extra to be able to transfer the business. The last group is able to identify and nurture the business to have lasting value. This value can be transferred to another generation or be transferred to others. This business owner will be able to sell the business for a premium and will be able to attract potential buyers.

Let’s begin with the “when” of transferring. This thought of “when” to transfer may be left to an event outside of the owner’s control. Here are a few examples:

  • An unexpected buyer comes knocking and makes an offer that cannot be turned down. It allows the owner to cash out the value of his business with a premium. The owner will have sold at the highpoint of the value of his business. This can be the great offer.A health illness arises with the owner or family member that requires a transfer of the business. This may be a sudden health or a long-term health matter. This leaves little time for planning or finding the best buyer. The owner may be willing to take a discount on the value of his business.
  • A fast growing or declining business can bring pressure to the owner to make changes to the business. Great success can overcome the owner and require him to find a buyer with resources which he does not have. This can be one of the four ‘P’s: people, product, pipeline or plant. With a declining business, the decision to transfer requires a realistic assessment of the future of the business. With the passage of time, the value, if any, will continue to decline. This can to lead to closing the doors at the end and walking away.

With family-held business, the timing of the transfer now includes whether the business will be transferred to the next generation of family members.

A lack of planning for the transfer to the next generation may create family strife. Many questions begin to arise as to who will be the successor and leader of the business. There will be, as part of this transfer, an additional emotional component to the transfer. The successor that is chosen needs to be able to leverage their strengths for the continued success of the business. With an immediate health illness, a family member may rise up to the task and take charge of this transfer.

The start of this process is today. No matter the time of the transfer, the owner needs to continue to develop and strengthen his business. He is always looking to the future so that he will have his business ready for a transfer as he may not be able to control the timing. He will have created and maintained the value of his business both now and for the future. He will have identified his goal and is currently working towards that goal. With a family-held business, he will be working with the next generation and provide them with the necessary training within the business. This training will often require a different skill set than his. He will show his leadership to the family by making decisions that preserve the family business and balancing the harmony of the family.

Next: Transferring the Closely-Held or Family-Owned Business – Part 2: Is the business for sale? Who are your potential buyers?

Jerry Nichols, CPA has been with the firm since 1972 and has developed deep, long-term relationships with clients and has become an essential advisor to them over his many years of service. He provides key ideas and assists with implementing strategies to improve business operations and minimize current and future tax dollars.

Hungerford Nichols is a Tax, Auditing and Business Advisory firm with offices in Grand Rapids and Greenville, MI. The firm is celebrating 74 years of helping closely-held and family-owned businesses in West Michigan.