Get me out of here

June 6, 2016

By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader

Not long ago, a long-time neighbor named Todd called me.  Todd, who was in his early 60’s, owned a transportation company with a bit of a niche and wanted to get together to talk about potentially exiting from the business. When we first met, he filled me in on how life was treating him. The business was growing and he was expanding its fleet and looking to bring more drivers on. There were profits and cash flow. From his point of view, he felt that there was more growth potential there, but wasn’t sure he had enough gas in the tank to get it there.

I asked him what his timeframe was for exiting the business. His face tightened ever so slightly as he confided in me that he had a few health concerns, had lost his father when he was close to his age, and he felt everyday he had was a gift. He wanted to move as quickly as possible so he could enjoy his family and life while his health and stamina allowed.

We talked a bit longer about the business and how he had originally started it as a hobby business after being downsized out of his construction engineering job. At first, he handled all the driving but as demand grew, he brought friends and family on board to help with the load.

As the business grew, he became what I refer to as an “accidental businessman,” managing the business, its accounting, finances, banking and legal matters as best he could on his own. Like many accidental businessmen (or women), in the spirit of saving money, business management was “Do It Yourself” (DIY). He did not seek out qualified advisors beyond his basic compliance needs such as preparing his tax return.

This DIY approach is not uncommon, but may lead to unintended consequences. Todd told me that he brought on the new drivers as independent contractors for several years. Eventually, the accountant preparing his tax return asked him about his employees. Being friends and family, working only for Todd, these folks were employees, subjecting Todd and his business to the employer requirements for remitting income and social security withholdings and taxes. Todd hadn’t been doing that. He knew it and the government now knew it. The financial liability was substantial and technically Todd could be held criminally responsible for it if the Feds wanted to play hardball. Todd was embarrassed that he found himself in this situation. It was never his intention to misrepresent the employment situation. Todd now recognized that he would have been better off surrounding himself with experienced advisors from the start.

Unfortunately, I had to add a bit of salt in his wound. With this sort of raincloud hanging over him and the business, it would be a miracle if he would find a buyer, let alone one that wouldn’t discount the daylights out of the price. It was going to take some time for him to get the payroll tax mess cleaned up. Prospective buyers would want to be sure that there weren’t other skeletons in the closet. Todd would have to demonstrate that the systems and procedures were in place. More importantly, the company would have to generate sufficient profits and cash flow to overcome its financial setback and attract a buyer. This could take a number of years to accomplish which was far longer than the six to nine months Todd had hoped for.

Todd left my office that day with plenty of things to think about, prioritize and do. His parting comments were the most telling: “I should have started thinking about this (selling process) years ago. If I had to start my business all over again, I would have surrounded myself with advisors that could help me do things the right way instead of doing it all myself.”

Todd now recognized that it’s never too early to start planning your exit from your business. In the process, you will identify opportunities for improving your business and its profitability along the way. As its owner, you’ll have confidence that you are building the value of what is likely the largest asset in your portfolio. Then, when your time comes, whether due to health concerns like Todd, an unsolicited kick-tail offer or an organized and planned transition to the next generation, you will be able to do it on your terms.

For more information or assistance on business transition strategy, call 888-556-0123, email or submit our online form.

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