Why you need a back-up strategy if something happens to key people in your business
By Daniel McCoy
It is never too early to consider how you will leave your business. Many restaurateurs are too caught up in the day-to-day activities of running their business to think about what happens when it is time for them to leave it, or worse, if something were to happen to them.
Recently, we had a situation where an owner died because of a car accident. She handled all the financial portion of the business herself and was the only signer on the checking account, which was frozen upon her death. Her employees were unable to get paid, as were the vendors and landlord. While the managers were in place to keep the business running, everything would have to be sorted out through probate court, which will take months or even years to settle. Meanwhile, the employees could not get paid, and the landlord was ready to foreclose.
We do not like to think of our own demise, but these events can and do occur. It is vitally important to have a back-up strategy if something happens to key people in the business. Estate planning is an important part of any business owner’s early agenda, both personally and professionally.
How could this have been avoided? Setting the business up properly with checks and balances in place can ensure this situation does not happen to you. If your business has grown to a size that many people would be affected, a visit to your attorney to make sure the business will survive you is a good start. It might be time to shift your legal entity to one that would not be negatively impacted, such as a corporation. If a large shareholder in a corporation is no longer able to act, the business is still a separate entity.
Another factor is an exit strategy for the owners. One case I recently dealt with was a mom-and-pop restaurant, where the owners have reached an age where they are ready to get out of the business. After closing due to COVID-19, their zeal and enthusiasm was no longer there. Their family members had careers and businesses of their own and did not want to be involved in a restaurant. The couple struggled to sell the closed business, and the buyers struggled even more to find financing.
In the end, the couple agreed to owner finance the business, which gave them a monthly income and was beneficial for tax reasons. The buyer hopes to refinance the seller note in two years through an SBA guaranteed loan.
Selling the business is often a difficult task. This is your baby that you have nurtured and helped grow. Often, the owner has spent more time in the business than with family. Having someone else take it over is hard to do, and sellers typically suffer grief over the sale, similar to a loss of a loved one.
The best time to sell a business is when it is at the top of production. This seems counterintuitive to most owners. Why would you want to get out when things are going well?
But if COVID-19 has taught us anything, it’s that things can shift rapidly. According to a recent article in Fortune, more than 110,000 eating or drinking places closed either temporarily or permanently in 2020. Selling any entity during a downturn will be difficult and time-consuming, and the seller rarely receives what they believe the business is worth. Saving on taxes is certainly something most business owners want to do, but it can cost money in the sales process if the company is showing even a paper loss.
One of my first bosses used to say, “Plan your work and work your plan.” Succession planning, like estate planning, often gets moved to a back burner, a get-around-to-it-later item. The examples above shows that having a plan for the “what if’s” is a sooner-rather-than-later item.
Daniel Mccoy joined the UGA Small Business Development Center at Kennesaw State University as a business consultant in 2017, after a 21-year successful banking career as a Commercial/SBA Lender and Financial Adviser and 10+ years in upper management in the retail industry. He is a Certified Professional for the Society of Human Resource Management (SHRM), a member of the National Society of Leadership and Success and recently completed the Veteran At Work Certification process. He is also a 2019 Flewellen Award Consulting Excellence winner. For more on how the UGA Small Business Development Center can help your concept, go to georgiasbdc.org or contact Daniel at dmcoy@georgiasbdc.org.
