March 2018
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

A successful succession/exit plan can be divided into 3 broad categories. First is analyzing and understanding the company’s assets and usable cash flow. A successful transition of your company depends upon the assets and stockholder’s equity that you have to work with, and most importantly, the usable cash flow available to pay for the acquisition. Second are the people involved. Will the buyer be a member of your family, a key employee, or will it be another company in your industry? If the buyer is a child or a key employee, then having that individual well-trained in all facets of running a family-held business is crucial to the success of this transition. Third are all of the legal and tax documents for the transfer being prepared by experts who have done this many times in order to protect the seller for all contingencies? Let’s look at each of these 3 items in more detail.

Most of you have spent at least 30 or 40 years running your business and looking at your profit and loss statement and your balance sheet as a business owner. Looking at those financial statements as a buyer is different. If you’re going to be transitioning the company to a member of the family or someone else in the next 3 to 5 years, you may want to have someone prepare a short valuation to show you new ways to look at the value of your company. Bottom line profitability is always important, but when we look at the total usable cash flow or “adjusted EBITDA” we are actually looking for other items over and above net income. Obviously, the more usable cash flow that a company produces, the more valuable it is. If you are selling your company to your children, they are going to need as much cash flow as possible in order to pay you a solid retirement income, to pay income taxes, and to have enough cash flow left to grow the company. If you are selling the company to key employees or someone else in the industry, you still need the highest usable cash flow possible. This is one of the main reasons I usually stress with business owners that during the last 3 to 5 years before retirement, the owner needs to try and increase gross margins by 1 or 2 percent and decrease expenses by possibly 2 to 3 percent. By making those improvements and increasing profitability by 3 or 4 percent, you are not only increasing the value of your company dramatically, but you are also providing the most important item to make the transition work – more cash flow.

If you have a company that is only breaking even or losing money, it will be very hard to sell it to your children or anyone else. There is simply no cash flow for them to pay the purchase price.

The second item is people. If you plan to sell the company to your children or to key employees in the next 3 to 5 years, it is important that you spend a lot of time in the next 36 months teaching those individuals every aspect of the business you normally take care of yourself. Most children that grow up working in a company are not totally prepared to become the owner, as mom and dad never told them everything. Sometimes it’s necessary to hire or fire people, and sometimes the company will need to get a bank line-of-credit. Over the next 36 months, you should authorize your children or key employees to take on more responsibility while you step back and watch and see how well they do. Your new successors need to spend more time with your accountants, attorneys, bankers, vendors, and all of the other individuals that are important to your company. You need to take some longer vacations, just make sure to take your laptop and watch what is going on in the company in your absence. Try not to call the office every day unless it is absolutely necessary. It is difficult for a 60 or 70-year-old business owner to transfer all of their knowledge to the next generation of ownership. Teaching is hard to do for most business owners, but it is part of a successful succession plan.

The third item is legal documents. It is very important that all of your legal documents are prepared by attorneys who have worked with hundreds of family businesses just like we have here at Castle Wealth Advisors.

If you are selling to the next generation, you will most likely need the following documents:

  • A Term Sheet or a Letter of Intent
  • A sales contract with provisions to protect the seller
  • A new updated 10-year Triple-Net Lease (if applicable)
  • Tax estimates pertaining to the sale for both the buyer and the seller
  • A Business Valuation Report if gifting stock is part of the plan
  • A Gift Tax Return prepared by your CPA (if necessary)
  • An up-to-date Buy-Sell Agreement that protects the company and all stockholders in case of death, disability, divorce, personal bankruptcy, termination, and retirement

Documents for the sellers and stockholders could include:

  • Wills and Revocable Living Trusts prepared by your estate tax attorney for the sellers and all stockholders.
  • Income estimates for future retirement outlined both before and after tax.
  • A Wealth Management Plan for the sellers and the family outlining how you want assets distributed, both to children that have taken over the company and children who have chosen a different career.
  • A Durable Power of Attorney for healthcare decisions for all stockholders, not only for the sellers, but also for each stockholder.
  • A General Durable Power of Attorney for the sellers and all stockholders.

You all have family doctors that you consult with each year. However, if you need an important operation, you will probably not use the same doctor, but go to a specialist who performs operations every day. This is the analogy that I use often in my presentations to business owners. When it’s time to transition your company that you have spent 30 years building, it’s time to use experts to make sure it gets done right. Seek out excellent business attorneys, estate tax attorneys, and make sure that your accountant can handle the business tax and the personal tax decisions associated with the transfer. Include a financial advisor who can give you answers and guidance on retirement income, future income taxes, and proper asset allocation to protect you and your family in the future. Make sure that all of your advisors are independent and charge fees rather than commissions for their services. You want to make sure that your attorneys, accountants, and financial advisors are all working in your best interest.

You’re moving into a new chapter of your life when you transition your business to a new owner. From that point on, you will not control the company which means that you will not control your salary, bonuses, or benefits. This is why you want to make sure that you know whether your net worth, after the sale is finished, is high enough to protect you in the future.

The summary of all of this is that for the next 3-5 years work on increasing your gross profits a little and decreasing your costs. Educate your children and key employees in every facet of running a successful closely-held family business and make sure to surround yourself with advisors that can provide you with lots of options on how to make this transition successful for everyone.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or e-mail Gary directly at .