In our prior post, we discussed favorable reasons why businesses change hands. In this post, we take a look at the other side of the coin – the not-so-favorable reasons why businesses change hands.

Unfortunately, many businesses sell or change hands under less favorable, even downright unfavorable, circumstances. The list of unfavorable circumstances that cause a business transfer is longer than the list of favorable reasons. Let’s take a look at some of the not-so-favorable reasons why businesses change hands.

• Desired gift and estate tax planning is delayed or incomplete.  The absence or lack of completeness of planned gift and estate tax planning can precipitate the forced sale of a business if an owner’s estate lacks the liquidity to handle estate taxes, or if a failure to plan for orderly and qualified management succession cripples the business when the owner is no longer there.
• An unexpected offer comes along and the business is not READY for sale.  The unexpected offer may or may not be a strong offer, and it might be a very good offer for the business in the condition it is in.  What the owner(s) will never know is what the opportunity cost of not having the business READY for sale is.
• The next generation is not up to the task or is not interested.  Good estate planning can be destroyed if the next generation of owners is not up to the task. While the transfer of ownership may be completed, a next generation that is incompetent can quickly destroy a company and a family’s legacy. Even worse, parents cannot, or at least should not, try to transfer ownership of a business to children who have no interest in running it. These issues call for frank discussions, rather than unrealistic assumptions, between parents and children.
• A primary owner dies.  Control passes.  Depending on the personal and business preparedness of the deceased owner, it may be quite unfavorable for the family and the business.  I recall two brothers who came to me after a speaking engagement. Their father had died unexpectedly at a relatively young age. He had intended to gift sufficient stock to his sons so that he would not own a controlling interest. He just never got around to it. The result is that the sons, who did inherit the business, were saddled with an estate tax bill that was several millions of dollars higher than it would have been had their father followed through on his promise.
• A key employee leaves (or dies).  The departure of a key employee can trigger the necessity or desire to sell a business, particularly if that key person takes important contacts, critical energy and/or leadership that keep things going and growing.  The death of a key employee can have significant adverse effects if there is no workable succession plan in place.  If a business is sold under this circumstance, the recent loss will likely be unfavorable to the sale.
• The owner gets “tired” and decides to sell.  Tiredness is an unbelievably frequent reason why business ownership transfers occur.  Unfortunately, if you as a business owner wait until you are tired, you are already on the down side of the value curve. Tired owners almost unavoidably transmit their “tiredness” to employees and customers in many subtle (or not so subtle) ways.  As an aside, we recently sold a  business where the owner got tired. His sales force was not allowed to act independently, development of new products virtually ceased, and revenues and profits fell. Needless to say, value fell as well, and the transaction was extremely difficult to bring to closing because of buyer concerns over being able to meet revenue projections.
• A primary owner divorces.  Marital dissolutions where family-owned or closely held businesses are marital assets occur with increasing frequency.  I recall a marital/corporate divorce where a couple owned a business with more than $100 million in sales.  Neither party could afford to buy out the other and their fighting was hurting the business.  The judge ordered that the business be sold under the guidance of a court-appointed expert.  Not favorable.  In another matter, ownership of a business comprised more than 95% of the marital net worth of a couple.  The business was not READY for sale, and the husband, in whose name the stock was held, had great difficulty in arranging financing to settle the marital estate.  Again, not favorable.
• A life-changing experience happens to an owner.  Business owners sometimes encounter life-changing experiences, including heart attacks, cancer, other illnesses, or close calls with death in accidents.  Alternatively, the death of a parent, spouse, or friend can trigger significant changes in the desire to own and run a business.  The emotional and/or physical shocks emanating from such experiences sometimes foster a strong desire to “do something differently with the rest of my life.”  Business transfers can be the immediate or eventual result of life-changing experiences, the timing of which may well not be favorable to selling, especially if the change provides motivation for an owner to make a sale quickly.
• A significant business reversal occurs.  Perhaps a company fails to adapt to a changing market, competition arises from unexpected quarters, or an accident or bad luck generate substantial losses.  Sometimes the affected businesses may never recover and forced sales occur.  Businesses sold or liquidated under these unfavorable circumstances seldom yield favorable results for their owners.

The point of this discussion of why business change hands it to show that many, if not most sales occur unexpectedly.  Logically, this places a premium for business owners to get their businesses in a state of being READY for sale and to maintain them in that condition.  We will talk about what this concept of being READY for sale means in more  detail shortly.

In the meantime, be well!

Chris