Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

January 7, 2021

Succession Planning – What For?

By Jeremy Albelda

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“Succession planning – what for? I have fun running my company every day and when I am dead, my kids can solve that problem!” [Quote] by unnamed 78-year-old business owner, Newark, NJ.

“No question – such approach is one of many approaches in planning the succession of a successful business, and unfortunately, we see such unpreparedness quite often in estate sales,“ says Achim Neumann, President, A Neumann & Associates, a Merger & Acquisitions and business brokerage firm, headquartered in New Jersey, “however, it can be avoided as it is most certainly not the most meaningful way to ensure the longevity of a business.”

Succession planning for a business owner should incorporate many considerations, including the owner’s transfer of wealth, continued employment for the folks who have helped over many years in the company and ensuring the legacy of a business. Simply leaving a business to its own destiny will most certainly result in significant disruptions due to discontinued management, interruptions to customers with product and service supplies and employees suddenly leaving the business due to uncertainty.  Most certainly not the results most business owners would look forward to!

But how does the successful business owner plan for succession after countless years building up their business?

Essentially, there are three viable “groups” to transfer the business to

  • Employees,
  • Family members,
  • Outside buyers.

The first group is the most problematic one, although many business owners tend to consider this option due to their perceived ‘obligation’ for past and continued loyalty. Sometimes, an ESOP is considered. However, in reality, employees often don’t have the financial resources to put a meaningful deal together for a business owner, more importantly, they lack the qualifications for being a true entrepreneur. Indeed, a great sales or accounting professional does not necessarily make for a great manager or business owner. Nobody is served well to transfer a business to an employee, and thus, potentially jeopardizing the continuation of the business and employment for all other folks in the process – setting aside that such deals are often leaving the business owner with holding a large note (that ultimately is never paid back).

The picture becomes even murkier with family members.

Without question, every business owner would like to see their offspring transition into the business and to continue the family legacy.   But, is a father or mother truly objective in evaluating the managerial qualities of their kids? All too often, such a view is not objective, as a matter of fact, in ninety percent of all the business sales by this firm, there are children but the business owner did not want to transition the business to them.  No question, some children are very qualified and talented, having “looked over the business owner’s shoulder” for many years but statistically speaking, they are the exception.

Essentially, this leaves a business owner with the last group, namely, external third party buyers for the business.  Without doubt, from a financial point of view, such sale is the most beneficial proposition of all.

After a Fair Market Valuation has been established by an accredited, third party valuation firm with a deal structure maximizing a potential transaction, the business sale can be reviewed for its tax implications and the owner will hire an M&A advisor to prepare the business for a sale. A typical planning horizon should be two to three years prior to a planned retirement.

By utilizing a reputable, qualified M&A advisor, the business owner will get access to a large group of potential investors with an established investor pre-qualification process, banking lending resources for investors and a proven deal making process and expertise. It will allow the business owner to continue focusing on the business operations and maximizing profitability while enjoying the rest of their life, and not being distracted by the sale process. Such benefits can not be overstated, as the “DIY” business sell approach often fails – compromising the confidentiality of the sale and seeing dramatically declining business performance (with a lesser transaction amount) in the process.

Once a deal has been closed, the business owner has accomplished a ”conversion” of the business value to cash, to now allow for a partial “cash distribution”, if so desired, to employees or family, in essence benefiting the very same groups that were initially considered recipients of the business in the succession planning.

Such “cash distribution” can take many different forms to family members, such as wills, trusts or outright cash gifts. However, for employees, such distribution can also be tied to certain post-closing performance, such as staying on for a certain period of time, essentially securing continued employment and a smooth transition in the process – a very handy prospective in the deal making process with a buyer.

Ultimately, the outright sale is a win-win situation for the business owner, not only having maximized cash receipts for the business transfer – without the lingering collection fear of large unpaid notes extended to employees or family members – but also now being in a position to determine the fractional allocation of cash between the owner, family members and employees.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

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James Belanger, Business Owner

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Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer

“I utilized A. Neumann & Associates to assist in an M&A process. They are VERY thorough in using their time-tested process to calculate the value of investment opportunities, a process which provided a very detailed explanation for the value of the potential opportunity. Additionally, they also went above and beyond to extend other services including connecting with others who specialize in your industry and can assist with necessary steps including legal and accounting. Highly recommended!”

Edward Lane , Business Owner

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Achim, who explained the process in detail. He had his colleague Gary come to my office in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using when the time comes for me to sell my business for max value. They gave me great insight into the steps I need to take now to get the best deal in the future. I highly recommend this firm to anybody who wants to sell now or down the road. They not only know their stuff, their actually just real nice guys.”

Robert Kardane, Business Owner
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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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